Question

Ashley is considering the purchase of a stock that has just paid a dividend of $0.72, today. The dividend is expected to grow at a rate of 2.8 percent per year and the market requires a return of 10% on assets of similar risks. What is the price that Ashley should pay for this stock?

Answer 1

Answer:

$10.28

Explanation:

Step 1. Firstly we use the of the The dividend discount model (DDM)

This calculation is: D1 = D0 x (1 + g)

D1 = $0.72 x (1 + 2.8%) = $0.74.

Where

Do = Dividend now

D1 = Dividend in year 1

g = growth

Step 2 Next, using the Gordon Growth Model,

Price per share is found to be D(1) / (r - g)

Price = $0.74 / ( 10% - 2.8%) = $10.28

where:

Do = Dividend now

D1 = Dividend in year 1

g = growth

r = required return