# Hall Marks just paid a $2.90 per share dividend yesterday (that is, D0 = $2.90). The dividend is...

## Question:

Hall & Marks just paid a $2.90 per share dividend yesterday (that is, {eq}D_0 {/eq} = $2.90). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock, {eq}r_s {/eq}, is 12%.

What is the stock's current value per share?

## Gordon Growth Model

The Gordon Growth Model or dividend discount model (DDM) allows investors to calculate the value of a share of stock with only next year's expected dividend, the rate of return on the stock and the expected dividend growth rate and excluding other factors like current market conditions.

## Answer and Explanation:

Using the Gordon Growth Model, we can calculate the stock's current value per share using the following formula:

{eq}Stock~value=\dfrac{D_{0}*(1+g)}{k-g}\\ where:\\ D_{0}=current~dividend\\ g=growth~rate\\ k=required~return\\ {/eq}

Using the above formula, we can now calculate the current market value of the stock

{eq}\begin{align*} Stock~value&=\dfrac{2.90*(1+.05)}{.12-.05}\\ &=\dfrac{3.045}{.07}\\ &=43.50 \end{align*} {/eq}

*The current market value of the stock is $43.50*

#### Ask a question

Our experts can answer your tough homework and study questions.

Ask a question Ask a question