Question

Calculate the value of the stock in a constant growth model, if (5 Points) Last Dividend paid, D 0 = $2.82 Expected constant dividend growth rate, E(g) = 12% Stock’s required rate of return, R(Re) = 14%

Answer 1

The value of the stock calculated using the constant growth model is $158, using the information provided about the last dividend paid, the dividend growth rate, and the required rate of return.

Step-by-step explanation:

The value of the stock using the constant growth model (also known as the Gordon Growth Model) can be calculated by the formula P = D1 / (R - g), where P is the price of the stock, D1 is the dividend expected next year, R is the required rate of return, and g is the growth rate of dividends. Given that D0 (the last dividend paid) is $2.82, the growth rate g is 12%, and the required rate of return R is 14%, we first calculate D1 as D1 = D0 × (1 + g) = $2.82 × (1 + 0.12) = $3.16.

Then, the value of the stock using the constant growth model is:
P = $3.16 / (0.14 - 0.12) = $3.16 / 0.02 = $158.