Question

​(Related to Checkpoint​ 10.1) ​(Common stock valuation​) Header​ Motor, Inc., paid a ​$2.71 dividend last year. At a constant growth rate of 5 ​percent, what is the value of the common stock if the investors require a 15 percent rate of​ return?

Answer 1

The value of the common stock today is $28.455 per share.

Step-by-step explanation:

For a stock that is paying constant growth rate in dividends, we use the constant growth model of the DDM to calculate the value of stock today. The formula for price using the constant growth model is,

Price = D1 / r - g

Where,

• D1 is the dividend expected in the next period or D0 * (1+g)
• r is the cost of equity or required rate of return
• g is the growth rate in dividends

Price = 2.71 * ( 1 + 0.05 ) / (0.15 - 0.05)

Price = $28.455