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


Learn more about this topic:

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What Are Dividends? - Investing in Stocks

from Business Law Textbook

Chapter 22 / Lesson 11
15K

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