Question #84
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 32
Status: Unattempted
Question
A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firm's shares is $35.00, what is the required return applicable to the investment based on the Gordon dividend discount model (DDM)?
Answer Choices:
A. 7.86%
B. 8.25%
C. 8.00%
Explanation
The Gordon DDM uses the dividend for the period (t + 1) which would be $1.05.
$35 = $1.05 / (required return – 0.05)
Required return = 0.08 or 8.00%