Question

If a firm is expected to pay a dividend of $2 this year (div0) and they expect dividends to grow by 5% per years, what is the theoretical price of that firms stock according to the dividend discount model if you have a 10% required return?

Answer 1

Po - Divi -9 Po = Price of Stock Divi = Estimated Dividends for Next Period r = Required Rate of Return 9 = Growth Rate

Div1 = $2 * (1 + 5%) = $2.10

$P_0 = \frac{2.10}{0.10 - 0.05}$

$P_0 = 42.00 ---> Answer$