Answer: $22.67
Explanation: The stock price according to the constant growth dividend model would be given by applying the formula:
P = D / (r - g)
Where P is current stock price
D is next year's dividend
g is expected growth rate of dividend
r is required rate of return for the Wallboard Inc
However, next year's dividend (D) would be gotten by adding the amount gotten from the percentage growth rate of the current dividend (Do) to the current dividend thusly:
[ Do + g%(D) ] = $0.8 + (6.25% x $0.8) = 0.8 + 0.05 = $0.85
Therefore, D = $0.85
Applying the formula P = D / (r - g),
P = 0.85 / (10% - 6.25%) = 0.85/0.0375 = $22.666 = $22.67 approximately.
The constant growth model, or Gordon Growth Model as a way of valuing stock assumes that a company's dividends are going to continue to rise at a constant growth rate indefinitely. However, it is very rare for companies to show constant growth in their dividends as a result of business cycles and some unexpected financial difficulties or successes.
