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The Firm X just paid a dividend of $1.26 per share on its stock. The dividends are expected to grow at a constant rate of 5% per year indefinitely. If investors require a 10% return on Firm X stock, what is the current price?

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Answer: $26.46

Explanation:

The value of the stock can be solved using the Gordon growth model.

[tex]= \frac{Current dividend * (1 + growth)}{required return - growth rate} \\\\= \frac{1.26 * (1 + 0.05)}{0.10 - 0.05}\\\\= 26.46[/tex]

= $26.46

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