Asked by Dominique Handy on Jun 23, 2024
Verified
Camden Properties has recently paid a dividend of $1. Dividends are expected to grow at a constant rate of 5% thereafter. If the required rate of return is 9%, then what is the current value of the stock?
A) $26.25
B) $25.00
C) $27.25
D) $20.00
Required Rate of Return
The minimum rate of return on an investment that investors expect, considering the risk associated with it.
Constant Rate
A fixed percentage or value that does not change over time.
- Understand the principles behind stock valuation, incorporating knowledge of the elements that affect the valuation of constant growth stocks, and the precise application of growth models.
Verified Answer
VS
vipin s babuJun 26, 2024
Final Answer :
A
Explanation :
The current value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth) as follows: P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. D1 = $1 * (1 + 0.05) = $1.05, r = 0.09, and g = 0.05. Thus, P = $1.05 / (0.09 - 0.05) = $26.25.
Learning Objectives
- Understand the principles behind stock valuation, incorporating knowledge of the elements that affect the valuation of constant growth stocks, and the precise application of growth models.