Sorvino Co. is expected to offer a dividend of $3.20 per share per
year forever.  The required rate of return on Sorvino stock is 13%. 
Thue, the price of a share of Sorvino stock, according to the dividend
discount model is $

A) 4.06
B) 4.16
C) 40.63
D) 24.62

Hi chooseme,

The Dividend Discount Model calculates the present value of a share of
stock based on its expected future dividends (rather than its expected
future earnings).

The Dividend Discount Model is explained at the moneychimp site:
http://www.moneychimp.com/articles/valuation/dividend_discount.htm

Moneychimp hosts an online calculator for the Dividend Discount Model:
http://www.moneychimp.com/articles/finworks/fmvaluation.htm

A full description of the formula behind the calculator is also
provided at the above page.

If I enter your figures into the DDM calculator as follows

   Earnings per share: $3.20
   Earnings growth rate: 0
   Years to grow: 0
   Desired rate of return: 13%

and press "calculate", it shows a "Current Fair Market Value" (price)
of $24.62, which corresponds to your answer "D".

Actually the online calculator rounds to the nearest dollar and shows
a price of $25, but if I enter the earnings per share in cents (320
cents instead of 3.2 dollars) then the online calculator returns the
more precise result of $24.62.


Google search strategy:

"dividend discount model"
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Regards,
eiffel-ga