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The Fish House increases its dividend each year. The next annual dividend is expected to be $2.80...

Question:

The Fish House increases its dividend each year. The next annual dividend is expected to be $2.80 a share. Future dividends will increase by 3.5% annually.

What is the current value of this stock if the discount rate is 10%?

Dividend Growth Rate:

In the dividend growth model, the dividend growth rate is an important determination of the price of a stock. If a firm maintains a constant dividend payout ratio, then the dividend growth rate will identical to the firm's growth of earnings per share.

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 = 2.80 / (10% - 3.5%)
  • price per share = 43.07

That is, the price of the stock per share is $43.07.


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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