Question

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

According to the Gordon model of the constant growth in dividend,

P0= D1/(required return-growth in Dividend)

119= 2.12/ 1.78%

it can be said that the any combination of deduction of growth in dividend from the required rate which will be coming at 1.7 8% will be providing the accurate value of intrinsic value of Walmart at $119.

It can be illustrated through an example by-

Required rate of return equals to 3.78%

Growth rate of the dividend= 2%

So, 2.12/(3.78%-2%)=(2.12/1.78%)= 119