Question

Assume that Cola Co. has a share price of $42.26. The firm will pay a dividend of $1.39 in one year, and you expect Cola Co. to raise this dividend by approximately 6.9% per year in perpetuity a. If Cola Co.'s equity cost of capital is 8.1%, what share price would you expect based on your estimate of the dividend growth rate? b. Given Cola Co.'s share price, what would you conclude about your assessment of Cola Co.'s future dividend growth? a. If Cola Co's equity cost of capital is 8.1%, what share price would you expect based on your estimate of the dividend growth rate? Cola Co.'s price per share should be SRound to the nearest cent.) b. Given Cola Co.'s share price, what would you conclude about your assessment of Cola Co.'s future dividend growth? Given Cola Co. 's share price today, its dividend growth rate should be | %. (Round to two decimal places.)

Answer 1

As per Constant Growth Model,

Stock Price = D₁/(r - g)

a.

Stock Price = 1.39/(0.081 - 0.069)

Stock Price = $115.83

b.

Stock Price = $42.26

So,

g = r - D₁/Stock Price

g = 0.081 - 1.39/(42.26)

g = 4.81%