Question

Estimating Stock Value Using Dividend Discount Model with Constant Perpetuity

Kellogg pays $2.25 in annual per share dividends to its common stockholders, and its recent stock price was $82.50. Assume that Kellogg’s cost of equity capital is 5.0%.

a. Estimate Kellogg’s stock price using the dividend discount model with constant perpetuity.

$Answer

b. Compare the estimate obtained in part a with Kellogg’s $82.50 price. What does the difference between these amounts imply about Kellogg’s future growth?

The estimated price is substantially lower than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit positive future growth and to increase its dividend per share beyond the current $2.25.

The estimated price is substantially higher than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit positive future growth and to increase its dividend per share beyond the current $2.25.

The estimated price is substantially lower than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit negative future growth and to decrease its dividend per share beyond the current $2.25.

The estimated price is substantially higher than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit negative future growth and to decrease its dividend per share beyond the current $2.25.

Answer 1

a. Estimated Kellog's stock price =

$2.25 $45 0.05

b. The estimated price is substantially lower than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit positive future growth and to increase its dividend per share beyond the current $2.25.

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