CFIN -STUDENT EDITION-TEXT
CFIN -STUDENT EDITION-TEXT
6th Edition
ISBN: 9781337407359
Author: BESLEY
Publisher: CENGAGE L
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Chapter 7, Problem 8PROB
Summary Introduction

The company has paid a dividend of $1.20 which is expected to grow continuously at a rate of 2.5% in perpetuity. The required rate of return on the stock is 15%.

Gordon constant growth model is used to determine the value of a stock. The model assumes that the dividend paid by the company would continue to grow at a constant rate in the foreseeable future. The present value of all these dividends paid till perpetuity is the market or present value of the stock. The model also assumes that the required rate of return of the stock should always be greater than the growth rate, otherwise, the value would become negative and meaningless.

Value of the stock when the dividends are growing at a constant rate is

P0=D1rsg=D0(1+g)rsgwhere,D1=dividend paid next yearD0=dividend paid this yearrs=required rate of returng=growth rate of dividend in perpetuity

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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY