how do you find the current stock price

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Expert Solution

In case of dividend growing at a constant rate till perpetuity ,formula for current stock price is given by -

D1/(r-g)

Where D1 = Dividend next year

r= required rate of return

g= constant growth rate

If same amount of dividend is given by stock till pereptuity then formula is -Dividend /required return

In case of stock in which dividend is growing at higher rate for some years and then growth rate becomes constant ,current stock price =Present value of all dividend during high growth period plus present value of dividend beyond abnormal growth period i.e,constant growth period whose formula is as discussed above

This above case where initially high growth period and then rate becomes constant is also called Two stage dividend discount model.

Also,Constant growth rate used in above formulas is calculated by following formula if not given in question:-

Retention or plowback ratio * Return on equity(ROE)

jeff jeffy answered 1 year ago

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