Question

The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock for 2014. (See Table 7.1) Year 2014 - Div $ 2.89 Year 2013- Div $2.53 Year 2012-div $2.22 Year 2011- Div $1.95 Year 2010- Div $1.71 Year 2009- Div $ 1.50

Answer 1

Growth Rate in 2010 = [1.71-1.50]/1.5 = .14 or 14%

2011= [1.95-1.71]/1.71 = 14.04 %

2012 = [2.22-1.95]/1.95 = 13.85%

2013 = [2.53-2.22]/2.22 = 13.96%

2014= [2.89- 2.53 ]/2.53 = 14.23%

Average growth = [14+14.04+13.85+13.96+14.23]/5

         = 14.016 %

Price at end of 2014 = D2014 (1+g)/(rs-g)

                 = 2.89 (1+.14016)/(.17-.14016)

               = 2.89 * 1.14016 /.02984

               = $ 110.42 per share