You are interested in investing in a company that expects to have the same growth rate of 6 percent forever. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock?
Select answer from the options below

$24

$58

$61

$23

To find the maximum price you’d be willing to pay for this stock, we use the **Gordon Growth Model** (also called the Dividend Discount Model), which values a stock with constant growth dividends. The formula is:

\[
P = \frac{D_1}{r - g}
\]

where:
- $ P $ is the price of the stock,
- $ D_1 $ is the dividend expected in the next year,
- $ r $ is the required rate of return (10% or 0.10),
- $ g $ is the growth rate (6% or 0.06).

### Step 1: Calculate $ D_1 $
The dividend paid last year was $ D_0 = 2.30 $. To find $ D_1 $:
\[
D_1 = D_0 \times (1 + g) = 2.30 \times (1 + 0.06) = 2.30 \times 1.06 = 2.438
\]

### Step 2: Plug values into the Gordon Growth Model
\[
P = \frac{2.438}{0.10 - 0.06} = \frac{2.438}{0.04} = 60.95
\]

Rounding this to the nearest dollar, the closest option is:

**$61**

---

Would you like a breakdown of each step or have any questions?

Here are 5 related questions for further exploration:
1. What if the required rate of return were 8% instead of 10%?
2. How would a higher growth rate affect the stock price?
3. What if dividends were expected to grow at a declining rate instead?
4. How does the Gordon Growth Model differ from other stock valuation models?
5. What if the company decided to increase the dividend payout next year?

**Tip:** The Gordon Growth Model works best when the dividend growth rate is lower than the required rate of return.

You are interested in investing in a company that expects to have the same growth rate of 6 percent forever. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock?

Find out how to calculate the maximum price you would pay for a stock with a 6% growth rate using the Gordon Growth Model. Given a previous dividend of $2.30 and a required return of 10%, this example walks through each calculation step. Perfect for finance students and investors learning valuation methods.

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