Question

Nyeil is a consumer products firm that is growing at a constant rate of 7.5 percent. The firm’s last dividend was $3.36. If the required rate of return is 18 percent, what is the market value of this stock if dividends grow at the same rate as the firm?

Answer 1

To calculate the market value of a stock, we can use the dividend discount model (DDM). The DDM takes into account the future dividends of the stock and discounts them to their present value based on the required rate of return.

In this case, the stock is growing at a constant rate of 7.5 percent, and the last dividend was $3.36. The required rate of return is 18 percent.

To calculate the present value of future dividends, we can use the formula:

PV = D / (r - g)

Where PV is the present value of the stock, D is the last dividend, r is the required rate of return, and g is the growth rate of dividends.

Using the given values:

PV = $3.36 / (0.18 - 0.075)

Simplifying the expression:

PV = $3.36 / 0.105

PV = $32

Therefore, the market value of this stock is $32.

In summary, to find the market value of a stock that is growing at a constant rate, we can use the dividend discount model. By discounting the future dividends to their present value based on the required rate of return, we can determine the market value of the stock.