Concept: Present Value 5

Question

Suppose a stock will pay a dividend annually forever. In​ particular, it will pay a

​$60

dividend in one year and the dividend will increase

1

percent per year thereafter. The interest rate is

2

percent. What is the​ stock's price?

The present value​ (PV) of the stock is

​$nothing

Answer 1

the dividend an any year , T, will be d1(1+g)^T. The dividend growth model has the PV of the asset = PV= d/(i-g) which = $60/(2%-1%) = $60.1% = $600