A stock has a dividend per share of $5 and is expected to grow at...

This question applies the Gordon growth (constant growth dividend discount) model, which values a stock as the present value of an infinite stream of dividends growing at a constant rate. The model assumes that dividends grow steadily and that the required rate of return exceeds the growth rate, ensuring a finite value. The formula is:

Stock Value = D₁ ÷ (r − g),

where D₁ is the dividend expected next year, r is the required rate of return, and g is the growth rate. If the current dividend is $5, the next dividend equals $5 × (1 + 0.03) = $5.15. Substituting into the formula gives:

$5.15 ÷ (0.09 − 0.03) = $5.15 ÷ 0.06 = $85.83.

This valuation approach is commonly used for mature firms with stable dividend policies and predictable growth. Financial managers and analysts rely on this model to estimate intrinsic stock value and assess whether a stock is overvalued or undervalued relative to its market price.