The current value of the stock = D / (k - G), where D is expected dividend per share one year from now, G is growth rate in dividends, and k is the required rate of return.
Your expected dividend one year from now will be (0.06 * 2.83) + 2.83 = $ 3.00, since you expect the dividend to grow at a rate of 6% every year.
Consequently, current value of the stock = 3.00 / (0.16 - 0.06) = $30.00.
Multiply the dividend by the growth rate of 6 percent. You get $3 rounded off.
Then use the Gordon Constant Growth Model
$3/(.16-.06) = $30
World-Tour Co. has just now paid a dividend of $2.83 per share (D0); its dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value of the stock, after paying the dividend?
