Question

You expect that Microsoft will pay a dividend of $1.50 in one year, $1.75 in two years, and $2.00 in three years. After that, dividends are expected to grow at 3% per year. If your required rate of return is 8%, what should be the price of Microsoft today according to the Dividend Discount Model?

Answer 1

Solution:

The Dividend Discount Model (DDM) is a mathematical approach to determine a share price predicated on the assumption that the present fair stock price is equal to the sum of all possible dividends of the enterprise The main difference in measurement strategies lies in the way cash flows are common.

They expect to pay use D1 formula

$P_{0}$ = 1.50 ( 0.08 - 0.03 )

   = 0.075 ( in one year )

$P_{0}$ = 1.75 ( 0.08 - 0.03 )

   = 0.087 ( in two years )

$P_{0}$ = 2 ( 0.08 - 0.03 )

    = 0.1 ( in three years )