Multiple Choice
Which of the following best explains why an adjustable-rate mortgage (ARM) is considered riskier than a fixed-rate mortgage?
79
views
7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
Suppose the most recent dividend (\(D_0\)) is \$5.70, the required rate of return (\(r\)) is 10%, and the dividend growth rate (\(g\)) is 5%. According to the Gordon Growth Model, what is the price per share today?
A
\$85.50
B
\$119.70
C
\$114.00
D
\$57.00
Verified step by step guidance1
Step 1: Understand the Gordon Growth Model formula, which is used to calculate the price of a stock based on its dividends. The formula is: \( P_0 = \frac{D_1}{r - g} \), where \( P_0 \) is the price per share today, \( D_1 \) is the dividend expected next year, \( r \) is the required rate of return, and \( g \) is the dividend growth rate.
Step 2: Calculate \( D_1 \), the dividend expected next year, using the formula \( D_1 = D_0 \times (1 + g) \). Substitute \( D_0 = 5.70 \) and \( g = 0.05 \) into the formula.
Step 3: Substitute the values of \( D_1 \), \( r \), and \( g \) into the Gordon Growth Model formula \( P_0 = \frac{D_1}{r - g} \). Use \( r = 0.10 \) and \( g = 0.05 \).
Step 4: Perform the subtraction \( r - g \) in the denominator of the formula. This represents the difference between the required rate of return and the dividend growth rate.
Step 5: Divide \( D_1 \) by \( r - g \) to calculate \( P_0 \), the price per share today. This will give you the theoretical value of the stock based on the Gordon Growth Model.
Related Videos
Related Practice
