Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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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?

$85.50

$119.70

$114.00

$57.00

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Verified step by step guidance

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.