Question

Consider a firm with a 9.5% growth rate of dividends expected in the future. The current year’s dividend was $1.32. What is the fair present value of the stock if the required rate of return is 13 percent?

Answer 1

Answer:

Using the DDM method we can find the fair value of the stock. For that we need the current years dividend, the company's growth rate and the required rate of return on the stock.

The formula for DDM is

Value = D*(1+G)/R-G

D= 1.32

G= 9.5%

R=13%

1.32*(1+0.095)/(0.13-0.095)= 41.29

The fair present value of the company based on the dividend discount model is $41.29.

Explanation: