Wallace Corporation just paid a dividend of $2.00 per common share. Historical data indicate Wallace’s dividends grow at a steady rate of 5% per year.... Accounting MCQs | Accounting MCQs

Wallace Corporation just paid a dividend of $2.00 per common share. Historical data indicate Wallace’s dividends grow at a steady rate of 5% per year. The required rate of return for investing in such stock is 18%. The current value of one share of Wallace’s common stock is

$16.15
$15.38
$11.67
$11.11Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (A) is correct. The dividend discount model (also known as the dividend growth 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 next dividend is calculated as $2.10 [$2.00 dividend × (1 + .05 growth rate)]. Thus, the current value of one share of common stock is calculated as $16.15 [$2.10 next dividend ÷ (18% cost of capital – 5% dividend growth rate)].