The Fish House increases its dividend each year. The next annual dividend is expected to be $2.32...

Question:

The Fish House increases its dividend each year. The next annual dividend is expected to be $2.32 a share. Future dividends will increase by 4.0% annually.

What is the current value of this stock if the discount rate is 12%?

Discount Rate:

The discount rate is a critical piece of information in the dividend discount model, because the model prices a stock to the discounted present value of future dividends. The higher the discount rate, the lower the price, all else the same.

Answer and Explanation:

We can use the dividend growth model to compute the price as follows:

  • price per share = next dividend / (required return - dividend growth rate)
  • price per share = 2.32 / (12% - 4%)
  • price per share = 29

That is, the price of the stock per share is $29.


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
10K

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