Question

ConsGrough, Inc. has increased its annual common dividend by 3% in each of the years that the company has existed. If you believe that the company can continue to do so indefinitely, then what price would you be will to pay for ConsGrough if the required rate of return is 6% and the dividend that it paid yesterday was $5?

Answer 1

Answer: $171.67 would be the price of the security

Explanation: This problem relates to dividend growth model, which can be shown as follows :-

$=\frac{D_{1}}{P_{0}}+\:G$

where'

d1 = expected dividend

p = price

g = growth rate

therefore,

$=\frac{\ 5\left ( 1+3\% \right )}{P_{0}}+\:3\%$

solving this we get

$p_0=\ 171.67$