Suppose Pale Hose, Inc. has just paid a dividend of $1.40 per share. Sales and profits for Pale Hose are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same amount. If the required return is 10%, what is the value of a share of Pale Hose?

A) $14.00
B) $15.25
C) $25.80
D) $28.00
E) $29.40

The value of a share of Pale Hose can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by $P_0=\frac{D_0\times (1+g)}{r-g}$ , where $P_0$ is the price of the stock today, $D_0$ is the most recent dividend paid, $g$ is the growth rate of the dividend, and $r$ is the required return. Plugging in the values: $P_0=\frac{1.40\times (1+0.05)}{0.10-0.05}=\frac{1.40\times 1.05}{0.05}=\frac{1.47}{0.05}=29.40$ .