Question

Golden Growth Model Goooog Corporation will pay a $3.56 per share dividend next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require an 11 percent return on your investment, how much will you pay for the company's stock today? 4)

Answer 1

This question requires application of constant growth dividend discount model, which can be mathematically represented as:

Div Po=- Po Price of Stock Divi = Estimated Dividends for Next Period r = Required Rate of Return g Grouth Rate

According to this model, for our question,

$V_0 = \frac{3.56}{0.11 - 0.0375}$

Answer is $49.10