Question

Part 1: Consider the Gordon model of constant growth rate assumption. State briefly what this model says about the value of stocks. In 2019, Walmart paid $2.12 in dividends per share. The stock traded for about $119 per share towards the end of the year. Find out a set of inputs to the Gordon growth model (e.g., the assumed growth rate g and the required rate of return r, that make the intrinsic value of the stock equal to the trading price of $119. There can be many combinations; you just need to find out one such combination by trial and error.

Answer 1

Gordon Growth Model

Price = Dividend /(rate of return - growth)

Here Dividend means Dividend which is expected to be paid next time (for the following year)

Let Growth rate in dividend be 10%

119 = (2.12 x 110%)/(r - 10%)

119 = 2.332/(r - 10%)

r - 10% = 2.332/119

r - 10% = 0.019597

r = 0.019597 + 10%

r = 1.9597% + 10%

r = 11.9597%

So inorder to give the stock price of $119 with last dividend paid being $2.12 per share, the growth in dividend should be 10% and Ke or r or required rate should be 11.9597%

Note: This is one such rate, there may be many combinations possible