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What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

Group of answer choices

Capital gain model

Dividend growth model

Present value model

Equity pricing model

Stock pricing model

Solutions

Expert Solution

Ans Dividend growth model

Dividend growth model computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount.

P0 = Price of Share
D1 = Current Dividend
Ke = Cost of Equity
g = growth rate
P0 = D1 / (Ke - g)
P0 = 3.27 / (16%- 9%)
P0 = 46.71
D1 = D0* (1 + g)
D1 = 3* (1 + 9.00%)
D1 = 3.2700

jeff jeffy answered 2 years ago
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