A company has just paid an annual dividend of $0.75 per share. If the dividends are expected to...

Question:

A company has just paid an annual dividend of $0.75 per share.

If the dividends are expected to grow at a rate of 10% p.a. forever and PPT shareholders are known to demand a return of 15%, at what price should PPT shares sell?

Constant Growth Model:

The constant growth model is a textbook model for stock valuation. To apply the model, we need to know the stock's next dividend per share, the expected growth rate of dividends as well as the required rate of return on the stock.

Answer and Explanation:

We can use the dividend growth model to compute the stock's price per share:

  • price per share = last dividend *(1 + dividend growth rate) / (required return - dividend growth rate)
  • price per share = 0.75 *(1 + 10%) / (15% - 10%)
  • price per share = 16.5

That is, the price of the stock should be $16.5 per share today.


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.5K

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