Question

You want to buy XYZ public company. The company currently has a dividend of $3.12, but has indicated they will increase the dividend by 3.1% each year. You expect an investment return of 9%. How much is this stock worth

Answer 1

$54.52

Step-by-step explanation:

The formula for determining share price is as stated below based on the Gordon Constant Dividend Model:

Share price=current dividend*(1+g)/(Ke-g)

current dividend=$3.12

g=constant dividend growth rate=3.1%

Ke=required return on the investment=9%

Share price=$3.12*(1+3.1%)/(9%-3.1%)

Share price=$3.12*1.031/5.9%

Share price=$3.21672 /5.9%

share price=$54.52