Question

Ex 4) The CI Corp. has just paid a cash dividend of $2 per share. If investors require 16% return from investments such as this and the dividend is expected to grow at a steady 8% per year, what is the current value of the stock

Answer 1

Answer:

P0 = $27

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

• D0 * (1+g) is dividend expected for the next period

• g is the growth rate

• r is the required rate of return  

P0 = 2 * (1+0.08)  /  (0.16 - 0.08)

P0 = $27