Dividend Growth Model

A company has just paid a dividend of $1.50 and it is expected to grow 6% per year for an indefinite period of time. If the required rate of return on the stock is 12% What would you pay most for the stock?

Expert Solution

The price of the share will be calculated using the dividend growth model.

Since the dividend is paid it will considered as D0

The necessary details required are:

Dividend Paid = $1.50

Growth rate = 6%

Required rate of return = 12%

The terms used are -

D0 - Dividend Paid

g- growth rate

k - Required Rate of return

$ \begin{align*}P0 &= \frac{D0\left ( 1+g \right )}{k-g}\\ &= \frac{\$1.50\left ( 1+0.06 \right )}{0.12-0.006}\\ &= \$26.5\end{align*} $

Hence, one should pay for most of the stock is $26.5

The price of stock is $26.5

Vinay answered 3 years ago

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Dividend Growth Model

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