Question

Constant-growth dividend discount model: Using the following data provided, calculate the current price of these stocks assuming an investor required rate of return of 11%.

Company	Current year’s dividend	Dividend growth rate	Current price
Cabo Technology	$0.85	5.0%
Cellular Systems	$3.00	3.0%
Candida Consultants	$5.00	9.0%
Coliseum Theaters	$12.50	10.0%

USE EXCEL AND SHOW ALL WORK

           

Answer 1

Company	Current year’s dividend	Dividend growth rate	Current price
Cabo Technology	$0.85	5%	$1.49
Cellular Systems	$3.00	3%	$38.63
Candida Consultants	$5.00	9%	$272.50
Coliseum Theaters	$12.50	10%	$1,375

Under Constant-growth dividend discount model,

Current price = D0 (1 + g) / Ke – g

Cabo Technology

= ( $0.85 x 1.05 ) / ( 0.11 – 0.05)

= $0.89 / 0.06

= $1.49

Cellular Systems

= ( $3.00 x 1.03 ) / ( 0.11 – 0.03)

= $3.09 / 0.08

= $38.63

Candida Consultants

= ( $5.00 x 1.09 ) / ( 0.11 – 0.09)

= $5.45 / 0.02

= $272.50

Coliseum Theaters

= ( $12.50 x 1.10 ) / ( 0.11 – 0.10)

= $13.75 / 0.01

= $1,375