Common stock valuationGilliland Motor Inc paid a 368 dividen

(Common stock valuation)Gilliland Motor, Inc., paid a $3.68 dividend last year. If Gilliland\'s return on equity is 17 percent, and its retention rate is 23 percent, what is the value of the common stock if the investors require a rate of return of 19 percent?

The value of the common stock is $ ______. (Round to the nearest cent.)

Solution

market price per share according to Gordon\'s model P = d/ k-g

where d = Dividend = $ 3.68

k = return on equity = 0.17

g = b x r

b = retention ratio = 0.23

r = rate of return = 0.19

g = 0.23 x 0.19 = 0.0437

P = 3.68 / 0.17 - 0.0437

= 3.68 / 0.1263

= $ 29.14

value of common stock P = $ 29.14