Question

The company expects dividends to growth at 20% per year for the next 12 years and eventually leveling off at 9% into perpetuity. DJI just paid a dividend of $1.95. If the required return on the stock is 12%, what is the current share price of the stock

Answer 1

Price of the stock today = $199.83

Step-by-step explanation:

The current price of the stock can be computed using the two stage dividend growth model of the DDM approach. The DDM or dividend discount model values a stock based on the present value of the expected future dividends from the stock.

The formula for the price of the stock today using the two stage growth model is attached.

Price of the stock today = 1.95 * (1+0.2) / (1+0.12) + 1.95 * (1+0.2)^2 / (1+0.12)^2

+ 1.95 * (1+0.2)^3 / (1+0.12)^3 + ... + 1.95 * (1+0.2)^12 / (1+0.12)^12 +

[ (1.95 * (1+0.2)^12 * (1+0.09)) / (0.12 - 0.09) ] / (1+0.12)^12

Price of the stock today = $199.83