Question

​(Common stock​ valuation)  The common stock of NCP paid ​$1.32 in dividends last year. Dividends are expected to grow at an annual rate of 8.00 percent for an indefinite number of years. a.  If your required rate of return is 10.50 percent​, what is the value of the stock for​ you? b.  Should you make the​ investment?

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L
2
3		As per dividend growth model, Price of share is the present value of all future dividends discounted at cost of equity.
4		Current Price of Share (P)	=Div0*(1+g)/(r-g)
5		Where Div0 is the dividend paid this year, r is cost of equity and g is perpetual growth rate of dividend.
6
7		Given the following data:
8		Dividend (Div0)	$1.32
9		Cost of equity (r)	11%
10		Growth rate (g)	8.0%
11
12		From Dividend growth model,
13		Share Price, P	=Div0*(1+g)/(r-g)
14			=$1.32*(1+8%)/(11%-8%)
15			$57.02	=D8*(1+D10)/(D9-D10)
16
17		Hence Value of stock is	$57.02
18