Question

is expected to pay a dividend of $3.33 next year. The company's dividend growth rate is expected to be 3.1 percent indefinitely and investors require a return of 12.5 percent on the company's stock. What is the stock price

Answer 1

Stock price $35.43

Step-by-step explanation:

The dividend discount model calculated the price of a company's stock on assumption that its current price is equal to the sum of all of its future dividend payments when discounted back to their present value.

P = D1/ r - g

D1 $3.33 g 3.1% r 12.5% P ?

P = 3.33/ 0.125-0.031

= $35.43

Answer 2

Stock price = $35.425

Step-by-step explanation:

According to the dividend growth model, the price of a stock is the present value of expected dividend discounted at the required rate of return.

This is done as follows:

Price of a stock = D×(1+r)/(r-g)

g- 3.1%, r -12.5

D×(1+r) = 3.33,Note that the dividend payable in year one = 3.33. We don't need to grow the dividend again. D stands for dividend in year O.

Price of stock

= 3.33/(0.125-0.031)

= $35.425

Stock price = $35.425