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estimate a current per share price of the stock.

estimate a current per share price of the stock.

Essentials Of Investments
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
Section: Chapter Questions
Problem 1PS
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3. (10 points) The Northwest Athletic Equipment Company has undergone tremendous growth over the past several years. Things are slowing now but they still anticipate a 3% annual rate in the growth of dividends per year indefinitely. If the market requires a 14% rate of return on comparable securities, and Northwest Athletic currently pays an annual dividend of $.50 per share, estimate a current per share price of the stock.
Transcribed Image Text:3. (10 points) The Northwest Athletic Equipment Company has undergone tremendous growth over the past several years. Things are slowing now but they still anticipate a 3% annual rate in the growth of dividends per year indefinitely. If the market requires a 14% rate of return on comparable securities, and Northwest Athletic currently pays an annual dividend of $.50 per share, estimate a current per share price of the stock.
Expert Solution
Step 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:

Price = Expected DividendExpected Return - Growth

Calculate the expected dividend:

Expected Dividend = Current Dividend 1 + growthExpected Dividend = 0.51+0.03Expected Dividend = $ 0.515

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