Dividend Discount Model in stable growth Your task is to value the stock price of Harrington...
Dividend Discount Model in stable growth
Your task is to value the stock price of Harrington Ltd with the Dividend Discount Model
(DDM) in stable growth. You have the following information:
Dividends per share DIV0 €1.89
Risk-free rate rF 3.00%
Beta β 1.182
Expected return on stocks 8.50%
Estimated long-term dividends growth rate 2.75%
Required: (a) Calculate the value of the stock of Harrington Ltd using the Dividend
Discount Model (DDM) in stable growth; (b) The stock currently trades at €39.40 in the stock market; would you recommend buying it?
Homework Answers
1)
Share price = D1 / required rate - growth rate
Share price = ( 1.89 * 1.0275) / 0.085 - 0.0275
Share price = 33.77
2)
I would NOT recommend buying it as the stock appears to be overvalued.
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