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?

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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 2 years ago

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Dividend Growth Model

Solutions

Expert Solution

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