The Anderson Pipe Co. just paid an annual dividend of $3.75 and is expected to grow at 8% for the foreseeable future. Harley Bevins generally demands a return of 9% when he invests in companies similar to Anderson.
What is the most Harley should be willing to pay for a share of Anderson?
Stock Valuation Method:
One of the fundamental method of stock valuation is the dividend discount model. According to this approach, the value of a stock is derived entirely from its stream of future dividends.
Answer and Explanation:
We can use the dividend growth model to compute the price of the stock as follows:
- price per share = current dividend *(1 + dividend growth rate) / (required return - dividend growth rate)
- price per share = 3.75 *(1 + 8%) / (9% - 8%)
- price per share = 405
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Learn more about this topic:
from Finance 101: Principles of FinanceChapter 14 / Lesson 3