Answer:
$33.13
Step-by-step explanation:
To calculate the expected share price using the dividend growth model, we can use the formula:
\[P = \frac{D_0 \times (1 + g)}{r - g}\]
Where:
- \(P\) = Expected share price
- \(D_0\) = Dividend per share at time 0 ($2.50)
- \(g\) = Growth rate of dividends (6% or 0.06)
- \(r\) = Equity cost of capital (14% or 0.14)
Substituting the values:
\[P = \frac{2.50 \times (1 + 0.06)}{0.14 - 0.06}\]
\[P = \frac{2.50 \times 1.06}{0.08}\]
\[P = \frac{2.65}{0.08}\]
\[P \approx 33.125\]
So, Nielson Motors' expected share price is closest to $33.13.
