Constant growth valuation Tresnan Brothers is expected to pay a $2.5 per share dividend at the...

Question:

Constant growth valuation Tresnan Brothers is expected to pay a $2.5 per share dividend at the end of the year (i.e., D1 = $2.5). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%.

What is the stock's current value per share? Round your answer to two decimal places.

Dividend Growth Model:

The dividend growth model can be used to find the intrinsic value or fair value of a stock that pays regular dividend and has a constant growth in dividends. These stocks usually come from mature industries where companies have limited scope for capital expansion. Therefore, the cash flows are utilized to pay healthy dividends to investors.

Answer and Explanation:

.

Given -

  • Dividend (D1) = $2.50
  • Dividend Growth (G) = 7% = 0.07
  • Required Return (K) = 15% = 0.15

The stock price can be calculated using the dividend growth model.

  • Stock Price (Po) = {eq}D1 / ( K - G ) {/eq}
  • Stock Price (Po) = {eq}2.50 / ( 0.15 - 0.07 ) {/eq}
  • Stock Price (Po) = {eq}31.25 {/eq}

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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