Question

12. Dividend discount model: Using the following data provided, calculate the current price of these stocks assuming an investor required rate of return of 7%. Dividend Growth = Year X Dividend / (Year X - 1 Dividend) - 1

Company	Next year’s dividend	Next year’s expected price	Current value
Alfred Publishing	$0.45	$22.00
Aldo Food Market	$1.75	$48.00
ABC Warehouse	$2.80	$72.00
Anderson Windows	$20.00	$1000.00

Answer 1

Current value=Future dividend*Present value of discounting factor(7%,time period)

Alfred Publishing:

Current value=0.45/1.07+22/1.07

=$20.98(Approx).

Aldo Food Market:

Current value=1.75/1.07+48/1.07

=$46.50(Approx).

ABC Warehouse:

Current value=2.80/1.07+72/1.07

=$69.91(Approx).

Anderson Windows:

Current value=20/1.07+1000/1.07

=$953.27(Approx).

Company	Current value
Alfred Publishing	$20.98(Approx)
Aldo Food Market	$46.50(Approx)
ABC Warehouse	$69.91(Approx)
Anderson Windows	$953.27(Approx)