Question

Ameritech Corporation paid dividends per share of \$3.56 in 2018, and dividends are expected to grow...

1. Ameritech Corporation paid dividends per share of \$3.56 in 2018, and dividends are expected to grow 5.5% a year forever. The investors’ required rate of return is 10%. What is the value per share, using the Gordon Growth Model? The stock is trading for \$80 per share. What would the growth rate in dividends have to be to justify this price?

Value per share using the Gordon Growth Model :

Value = D1/ (k-g)

Where, D1 = Dividends which would be paid next year

K = Investor's required rate of return = 10%

g = constant growth rate of dividend = 5.5%

D1 = 3.56 * (1+0.055) = 3.7558

Value = 3.7558/(0.10 - 0.055)

Value = \$83.46

Answer : Value per share is \$83.46

To justify the ongoing price of \$80, the growth rate should be :

80 = 3.56 * (1+g)/(0.10 - g)

From the following equation, g = 5.31%

The growth in dividends should be 5.31% to justify \$80

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