Question

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. The growth rate of dividends is expected to be 5.2%. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, what is the value of the stock?

Answer 1

Answer:

The price of the stock today is $42.94

Explanation:

The price of a stock whose dividends are expected to grow at a constant rate is calculated using the constant growth model of Dividend Discount model approach. It bases the price of the stock on the present value of the expected future dividends. The price today under this model is calculated as follows,

P0 = D0 * (1+g)  /  r - g

Where,

• D0 * (1+g) is the D1 or the dividend for the next year
• r is the required rate of return
• g is the growth rate in dividends

P0 = 4 * (1+0.052)  /  (0.15 - 0.052)

P0 = $42.938 rounded off to $42.94