# 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.

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.