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Netscrape Communications does not currently pay a dividend. You expect the company to begin...

Question:

Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $2.6 per share dividend in 15 years, and you expect dividends to grow perpetually at 3.6 percent per year thereafter. If the discount rate is 13 percent, how much is the stock currently worth?

Dividend gordon growth model

A dividend gordon growth model is a stock valuation model that calculates the intrinsic value of the stock based on the growth rate of its future dividend payments. In this model, it excludes the other external and internal factors that may influence the market value of the stock, such as change of management or economic downturn.

Answer and Explanation:

Formula on calculating the present value of the stock

{eq}Stock~value=\frac{D}{k-g}*\frac{1}{(1+k)^{n}}\\ whereas:\\ D=dividend\\ k=required~return\\ g=growth~rate\\ n=number~of~periods\\ {/eq}


{eq}\begin{align*} Stock~value&=\frac{2.60}{.130-.036}*\frac{1}{(1+.13)^{15}}\\ &=\frac{2.60}{.094}*\frac{1}{6.2543}\\\\ &=27.66*.1599\\ &=4.42 \end{align*} {/eq}

The current market value of the stock is $4.42


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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