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%?
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.
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from Finance 101: Principles of FinanceChapter 14 / Lesson 3