Suppose D0 is $5.70, R is 10%, and g is 5%. What is the price per share today?

Multiple Choice

$57.00

$114.00

$119.70

$129.70

$135.00

To find the price per share today, we can use the **Dividend Discount Model (DDM)**, specifically the formula for a growing perpetuity:

\[
P_0 = \frac{D_1}{R - g}
\]

Where:
- $P_0$ is the price per share today.
- $D_1$ is the dividend expected next year.
- $R$ is the required rate of return (10% or 0.10).
- $g$ is the growth rate of dividends (5% or 0.05).
- $D_0$ is the dividend just paid, which is $5.70$.

First, we calculate $D_1$, the dividend expected next year:

\[
D_1 = D_0 \times (1 + g) = 5.70 \times (1 + 0.05) = 5.70 \times 1.05 = 5.985
\]

Now, apply the DDM formula to find $P_0$:

\[
P_0 = \frac{5.985}{0.10 - 0.05} = \frac{5.985}{0.05} = 119.70
\]

Thus, the price per share today is **$119.70**.

The correct answer is:

**$119.70**

Would you like more details or have any other questions?

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Here are five related questions to expand on this:

1. How would the price change if the growth rate were higher, say 7%?
2. What would the price be if the required rate of return increased to 12%?
3. How does the Dividend Discount Model (DDM) compare to other stock valuation methods?
4. What happens to the stock price if the dividend payout decreases while keeping all other factors constant?
5. How is the DDM useful for estimating the value of companies that do not pay dividends?

**Tip:** In the DDM, small changes in the growth rate ($g$) can lead to significant changes in the estimated stock price due to its presence in the denominator.

Suppose D0 is $5.70, R is 10%, and g is 5%. What is the price per share today? Multiple Choice: $57.00, $114.00, $119.70, $129.70, $135.00

Find the price per share using the Dividend Discount Model (DDM). Given D0 = $5.70, required return (R) = 10%, and dividend growth rate (g) = 5%, learn the step-by-step process to calculate the stock price today, with an answer of $119.70.

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