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What is the estimated value of a stock, which paid a $10 dividend D0 last year,...

What is the estimated value of a stock, which paid a $10 dividend D0 last year, expects dividends to grow at 5%, and requires a 20% return?

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Answer #1

Information provided:

Current dividend= $10

Dividend growth rate= 5%

Required return= 20%

Price of the stock =D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of the stock = $10*(1 + 0.05)/ 0.20 – 0.05

                             = $10.50/ 0.15

                              = $70

In case of any query, kindly comment on the solution.

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