The ABC Co. has paid annual dividends of $0.30, $0.64, $1.20, and $1.45 over the past...
The ABC Co. has paid annual dividends of $0.30, $0.64, $1.20, and $1.45 over the past four years. Dividends in the future are expected to grow at a constant rate of 3.5%. Which one of the following formulas should be used to compute the value of the stock today?
a.P0 = D1/(1 + r)1+ D2/(1 + r)2... + Dn/(1 + r)n+ Pn/(1 + r)n
b.P0 = D/r
c.P0 = D1/(1 + r)n+ g
d.P0 = D1/(r - g)
e.P0 = D1/(r - g)n
Homework Answers
Dividends paid by the stock are increasing not at a constant a constant growth rate. Gordon growth formula can be used only for stocks with constant growth rate. To arrive at stock price, each cash flow present value has to be calculated.
Hence, correct option is A.
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