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Suppose Company B pays $6 dividend per share in perpetuity, what is the value of the...

Suppose Company B pays $6 dividend per share in perpetuity, what is the value of the shares if the required rate of return is 20%? If the stock is selling at $50, is it worth buying? why?

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Answer #1

The constant growth model is a method for valuing the share price of a stock. It calculates the intrinsic value of a stock. It is also known as the Dividend Discount Model (DDM) or Gordon’s Growth Model (GGM).

It is an important tool in comparing various companies across industries while making an investment decision.

It is calculated as:

Substitute the values and calculate the Price:

The value of the share is $ 30

If the stock is selling at $ 50, it is not worth buying.

It should not be purchased as the stock is overpriced. The value of the shares is $ 30 but it is trading at $ 50

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