Given the information in the table,
Current dividend $5.00
Growth Rate in Dividends 2.00%
Required Return on Equity Rs 4.00%
According to the Gordon Growth Model, what is the price in year 5
?
Current Dividend = $5
g = Grwoth rate = 2%
r = required return on equity = 4%
Dividend in Year 6 = Current Dividend * (1+g)^n
= $5 * (1+2%)^6
= $5 * 1.12616241926
= $5.6308121
According to Gardon Growth model, the price of stock year n is calculated as below
Price of stock in year n = Expected Dividend in Year n+1 / (Required retun on equity - growth rate)
Price of stock in Year 5 = Dividend in Year 6 / (Required retun on equity - growth rate)
= $5.6308121 / (4% - 2%)
= $5.6308121 / 0.02
= $281.540605
Price of stock in Year 5 is $281.54
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