Header Motor, Inc., paid a $3.39 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 8 percent rate of return?
Dividend Growth Model:
One approach of stock valuation is to price the stock to the discounted present value of the stock. The dividend growth model in addition assumes dividend grows at a constant rate g. Given next projected dividend D, and the required return R, the price of the stock is D / (R - g).
Answer and Explanation:
The price of the stock is $118.65.
Applying the dividend growth model, the price of the stock = last dividend payment *(1 + growth rate) / (required return - growth rate ) = 3.39*(1 + 5%)/(8% - 5%) = $118.65.
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from Finance 101: Principles of FinanceChapter 14 / Lesson 3
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