Question

Clipboard Alignment AZ X v for 2 EN E H Using the constant growth model equation, calculate today's value of the cash flows described in the following sentences. A $4.50 annual dividend was received today, and future annual dividends are expected to be 103% of the previous year's dividend. The expected rate of return is 8%. The dividends are expected to continue in perpetuity. Format your answer as currency, and show the cents.

I need this answered step by step with the Constant Growth Model please

Answer 1

As per the Dividend growth Model

P = D₁`/ (r-g)

where

P = Current stock Price

D1 = Next year dividend

r = rate of return

g = growth rate

D1 = Current dividend * (1 + g)

D1 = 4.5 * (1 + 3%)

D1 = 4.635

Hence,

P = 4.635 / ( 0.08 - 0.03)

P = $ 92.7