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What would be the approximate expected price of a stock when dividends are expected to grow...

  1. What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate in each of years 2 and 3, and then grow at a constant rate of 6% if the stock's required return is 14% and next year's dividend will be $5.00? (select the closest choice)

    A.

    $68.64
    B.

    $73.44
    C.

    $84.34
    D.

    $71.25
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Answer #1

Ans- The Gordon growth model can be used to value a firm that is in a 'steady state' with dividends growing at a rate that can be sustained forever. The Model The Gordon growth model relates the value of a stock to its expected dividends in the next time period, the cost of equity, and the expected growth rate in dividends.

Value of Stock = DPS1/Ke-g

where, DPS1 = Expected Dividends one year from now (next period)

ke= Required rate of return for equity investors

g = Growth rate in dividends forever

=$5+25%/0.14-.06

=$78.125

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