Question

Suppose Nabisco Corporation just issued a dividend of $1.79 per share yesterday. Subsequent dividends will grow at a constant rate of 7.7% indefinitely. If the required rate of return for this stock is 10.5%, what is the value of a share of common stock today?

Answer 1

The price of the stock today is $68.85

Step-by-step explanation:

The stock's dividends are expected to grow at a constant rate indefinitely. Such a stock qualifies under the constant growth model of the DDM and the price for such a stock today is calculated using the following formula,

P0 = D0 * (1+g) / r - g

Where,

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

P0 = 1.79 * (1+0.077) / (0.105 - 0.077)

P0 = $68.85