An analyst is in the process of determining what the current share price should be for PaperToy, Inc. In early January, the analyst collected the foll... Accounting MCQs | Accounting MCQs

An analyst is in the process of determining what the current share price should be for PaperToy, Inc. In early January, the analyst collected the following information on PaperToy, Inc.
? Dividend at end of current year = $1.00
? Yearly dividend increase = 5%
? Expected investor return = 10%
Based on the data provided, the current share price for PaperToy, Inc., should be

$21.00
$20.00
$7.00$6.67Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (B) is correct. The dividend discount model is a method of arriving at the value of a stock by using expected dividends per share and discounting them back to present value. The formula is as follows: Dividend per share ÷ (Cost of capital – Dividend growth rate). Because the dividend at year end is given, this amount need not be discounted. Therefore, the current share price for PaperToy should be $20 ($1 ÷ .10 – .05 .