Question

Assume that a company’s dividends per share are projected to grow at 2% each year, its next year’s dividends per share is $1.80, and its cost of equity capital is 5%. Estimate the company’s per share stock price. Round your answer to the nearest dollar.

Answer 1

Answer:

P0 = $60

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 = D1 / (r - g)

Where,

D1 is dividend expected for the next period /year

g is the growth rate

r is the required rate of return or cost of equity

P0 = 1.8 / (0.05 - 0.02)

P0 = $60