Noel Company's common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? A. $15.00 B. $22.22 C. $23.33 D. $40.00
Question
Noel Company's common stock has just paid a 15.00 B. 23.33 D. $40.00
Solution
To calculate the value of a share of P. Noel stock, we can use the dividend discount model (DDM). The DDM formula is:
Value of Stock = Dividend / (Expected Rate of Return - Dividend Growth Rate)
Given that the dividend is $2.00, the expected rate of return is 14%, and the dividend growth rate is 5%, we can substitute these values into the formula:
Value of Stock = $2.00 / (0.14 - 0.05)
Simplifying the equation:
Value of Stock = $2.00 / 0.09
Value of Stock = $22.22
Therefore, the value of a share of P. Noel stock is $22.22.
The correct answer is B. $22.22.
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