Wesen corp. will pay a dividend of $4.00 next year. the company has stated that it will maintain a constant growth rate of 5 percent a year forever. if you want a return of 17 percent, how much will you pay for the stock?
Here we use the Gordon Growth Model, which says:
Value = (next year dividend) / (required rate of return - growth rate)
Value = (4.00) / (17% - 5%) = $33.33
You wold pay $33.33 for the stock.
