## Dividend Growth Model:

The dividend growth model is used to priced a stock with perpetual growth in dividends. The price of such a stock is the next dividend per share divided by the difference between the required rate of return and the dividend growth rate.

We can use the dividend discount model to compute the price of the stock. According to this model, the price of a stock is the discounted present value of future dividends. Let the growth rate of the dividend after year 4 denoted by {eq}g {/eq}, then we have:

• {eq}\dfrac{1.5}{(1 + 12\%)^2} + \dfrac{2.5}{(1 + 12\%)^3} + \dfrac{3.5}{(1 + 12\%)^4} + \dfrac{3.5*(1 + g)}{(12\% - g)(1 + 12\%)^4} = 30.66\\ 5.20 + \dfrac{3.5*(1 + g)}{(12\% - g)(1 + 12\%)^4} = 30.66\\ g = 3\% {/eq}

That is, the expected growth rate after year 4 is 3%.