Question

A firm just paid a dividend of $4.40. The dividend is expected

to grow at a constant rate of 2.72% forever and the required rate
of return is 13.40%. What is the value of the stock?

Answer 1

The value of the stock with a dividend of $4.40, growing at a rate of 2.72% with a required return of 13.40%, is calculated using the Dividend Discount Model (DDM) formula P = D / (r - g) and is found to be $41.19.

Step-by-step explanation:

The value of a stock that has just paid a dividend of $4.40 and is expected to grow at a constant rate indefinitely can be calculated using the Gordon Growth Model, also known as the Dividend Discount Model (DDM). To calculate the value of the stock (P), use the formula P = D / (r - g), where D is the dividend just paid, r is the required rate of return, and g is the growth rate of the dividend. In this case, we calculate the value of the stock as follows:

P = 4.40 / (0.1340 - 0.0272) = 4.40 / 0.1068 = $41.19.

Therefore, according to the Dividend Discount Model, the value of the stock should be $41.19 if the dividends are expected to grow at a constant rate with the given required rate of return.