Question

Suppose a particular stock just paid a dividend of $2.50 and expects to grow the dividend by 4% per year, indefinitely. What is the price of the stock if the required return by shareholders is 15%?

Answer 1

Using the dividend discount formula we can find what the price of a stock should be using its growth rate, required return and dividend amount.

The formula is D*(1+G)/R-G, where d= dividend, G= Growth rate and R = required return. In this case we know the dividend is 2.50, the growth rate is 4% and the required return is 15% so in order to find the value or price of the stock we will input these values in the formula.

2.5*(1+0.04)/0.15-0.04=23.63

According to the dividend discount method the price of the stock should be $23.63.

Step-by-step explanation: