Consider the valuation of a share of common stock that paid a $2 dividend at the end of last year and is expected to pay a cash dividend every year from now to infinity. Each year, the dividends are expected to grow at a rate of 10%. Based on an assessment of the riskiness of the common stock, the investor's required rate of return is 15%. What is the value of this common stock

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Valuing Common Stock
Using the Discounted Constant Dividend Growth Rate Model
Problem Illustration:
Consider the valuation of a share of common stock that
paid a $2 dividend at the end of last year and is
expected to pay a cash dividend every year from now to
infinity. Each year, the dividends are expected to grow at
a rate of 10%. Based on an assessment of the riskiness of
the common stock, the investor's required rate of return
is 15%. What is the value of this common stock
Do(1 + g)
Dividend in year 1
g
CS
Stockholders' Required
Rate of Return
Growth
Rate
V cs
Transcribed Image Text:Valuing Common Stock Using the Discounted Constant Dividend Growth Rate Model Problem Illustration: Consider the valuation of a share of common stock that paid a $2 dividend at the end of last year and is expected to pay a cash dividend every year from now to infinity. Each year, the dividends are expected to grow at a rate of 10%. Based on an assessment of the riskiness of the common stock, the investor's required rate of return is 15%. What is the value of this common stock Do(1 + g) Dividend in year 1 g CS Stockholders' Required Rate of Return Growth Rate V cs
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