Question

The last dividend (D0) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price according to the constant growth dividend model

Answer 1

Answer:

Price = $31.8  

Explanation:

The formula for constant growth dividend model is:

  Price =  D1

               r-g

Or

  Price = D0 (1+g)

                   r-g

where,

D0 = Last Dividend Paid

r = required rate of return

g = growth rate

Substitute the values now in the formula according:

   Price =   1.80 (1+0.06)

                     0.12-0.06

   Price =  1.908

                  0.06

   Price = $31.8