Question

Determine the value of a stock with the following variables using the constant growth model:

Current annual dividend: $1.50 per share

Required return rate: 6.5%

Constant growth rate: 4.5%

a.) $78.38

b.) $35.50

c.) $75

d.) $79.88

Determine the value of a stock with the following variables using the constant growth model:

• Current annual dividend: $2 per share
• Required return rate: 6%
• Constant growth rate: 4%

• a.)$100
• b.)$106
• c.)$104
• d.)$53

• Determine the value of a stock with the following variables using the constant growth model:

• Current annual dividend: $1.20 per share
• Required return rate: 8%
• Constant growth rate: 5%
• a.)$40
• b.)$43.20
• c.)$26
• d.)$42

Answer 1

Value of the Stock formula=Dividend1/(required rate-growth rate)

a. Given current dividend D0=$1.5

Dividend next year,D1=D0*(1+growth rate)=$1.5*(1+4.5%)=1.5675

Value of the Stock=1.5675/(6.5%-4.5%)=$78.38 (Option a is correct)

b. Given current dividend D0=$2

Dividend next year,D1=D0*(1+growth rate)=$2*(1+4%)=2.08

Value of the Stock=2.08/(6%-4%)=$104.0 (Option c is correct)

c.Given current dividend D0=$1.20

Dividend next year,D1=D0*(1+growth rate)=$1.20*(1+5%)=1.26

Value of the Stock=1.26/(8%-5%)=$42.0 (Option d is correct)