Staggert Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years....

Question:

Staggert Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, the company expects its dividend growth rate to be constant at 6 percent.

If the required rate of return is 18.5 percent, what is the current value of the stock?

Dividend Growth Model:

The dividend growth mode is an appropriate valuation method for a stock whose dividends are projected to grow at a constant rate indefinitely. According to this model, the price of a stock is the ratio of the next dividend to the difference between required return and dividend growth rate.

Answer and Explanation:

To find the current stock price, we can use the dividend discount model. According to this model, the price of the stock is the discounted present value of future dividends, i.e.,

  • {eq}\dfrac{5}{(1 + 18.5\%)} + \dfrac{6.25}{(1 + 18.5\%)^2} + \dfrac{4.75}{(1 + 18.5\%)^3} + \dfrac{3}{(1 + 18.5\%)^4} + \dfrac{3*(1 + 6\%)}{(18.5\% - 6\%)(1 + 18.5\%)^4}\\ = 13.046 + 12.90 \\ = 25.946 {/eq}

That is, the current price of the stock is $25.946.


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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