Question

Gordon Growth Model

Po=D/(r-g)

Year	Dividend	Rate of Change
2015	1.32	-
2016	1.4	6.06%
2017	1.5	7.14%
2018	1.65	10%
2019	1.75	6.06%

Where:

D=1.75   r= 0.036113. g= 7.32%

Problem is that Po is a negative since g>r...even though g<r..... How do I find the correct Po (Stock price)...

Answer 1

You use the constant growth model when the dividends grow at a constant rate into perpetuity.

However, this cannot be used when r < g

This also cannot be used when the dividends do not grow at a constant rate.

So, to find the correct stock price using the dividend discount model, you just need to find the present value of all future dividends. In the above table, you can discount each dividend to get the present value and make an assumption that the dividend grows at a constant rate after the year 6 and bring this to present value to find the stock price.

Hope the explanation is clear!

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