Question

Question: Constant Dividend Growth

Unlike bond pricing, Excel does not have built-in functions for stock pricing, so we need to create our own equations. We will begin with constant growth in dividends. Suppose we have a stock with the following:

Current dividend:		$     2.40
Dividend growth rate:		5.00%
Required return:		13.00%

With this growth rate, the dividend next year will be:
	Dividend next year:

So, the stock price today with the constant dividend growth model is:
	Stock price today:

Please help answer the question above "Stock Price Today:"

Answer 1

Dividend Next Year

Dividend Next Year = Current Year Dividend x (1 + Growth Rate)

= D0 x (1 + g)

= $2.40 x (1 + 0.05)

= $2.40 x 1.05

= $2.52

“Dividend Next Year = $2.52”

Stock Price Today

As per the Constant Growth Dividend Model, the price of the stock today is calculated by using the following formula

Stock Price Today = D1 / (Ke – g)

Where, Next Year Dividend (D1) = $2.52 per share

Required Rate of return (Ke) = 13%

Dividend growth rate (g) = 5%

Therefore, The Stock Price Today = D1 / (Ke – g)

= $2.52 / (0.13 – 0.05)

= $2.52 / 0.05

= $31.50 per share

“Stock Price Today = $31.50 “