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If expected dividends grow at 6% and the appropriate discount rate is 10%, what is the value of a...

Question:

If expected dividends grow at 6% and the appropriate discount rate is 10%, what is the value of a stock with an expected dividend of $2.75?

a. $68.75

b. $103.12

c. $34.38

d. $69.75

Dividend growth model:

The dividend growth model assumes that dividends will grow at a constant rate and all the future cash inflows are discounted to know the present value of a stock.

Answer and Explanation:


We will use the following formula to calculate our answer:

{eq}\displaystyle\text{Value of stock} = \displaystyle\frac{\text{Dividend}}{\text{Rate of return - Growth rate}} {/eq}

{eq}\displaystyle\text{Value of stock} = \displaystyle\frac{\$2.75}{10\% - 6\%} {/eq}

{eq}\displaystyle\text{Value of stock} = \displaystyle\$68.75 {/eq}


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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