Question

matilda industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. if matilda's equity cost of capital is 9%, which of the following would be closest to matilda's stock price? how would this problem have changed if the dividends were expected to grow? (we will talk about this in class as part of the review)

Answer 1

The stock price for Matilda Industries would be $23.33 per share based on the dividend discount model.

In this case, we can calculate the stock price using the dividend discount model (DDM). The DDM formula assumes that dividends are paid indefinitely at a constant rate and discounts them back to their present value.

We can use the formula:

Stock Price = Dividend / Equity Cost of Capital

Given that Matilda Industries pays a dividend of $2.10 per share and the equity cost of capital is 9%, we can calculate the stock price:

$2.10 / 9% = $23.33

Therefore, the closest stock price to Matilda Industries would be $23.33.

If the dividends were expected to grow,

we would need to use a different valuation model such as the Gordon Growth Model (GGM) which takes into account the expected growth rate of dividends.