Question

2. Suppose you are given the following historical data for Deep Sea Fisheries:
Year       EPS      Dividend per share
1997        $2        $1
1998        $4        $2
1999        $2        $1
2000        $4        $2

Deep Sea Fisheries got a new fishing government contract which guarantees EPS of $2.50 a year for the next 80 years. The cost of capital for Deep Sea Fisheries is 8%. Assuming all the earnings are paid out as dividends, using the constant dividend growth model, the stock price of Deep Sea Fisheries is:

a)$25.75
b)$38.50
c)$15.63
c)$30.06
e)$31.25

Answer 1

Dividend growth model is one of the valuation model used for calculation of fair value of stock price by taking into consideration dividend growth either at constant rate or at different rate during given period.