Financial management MBA

Question

If a firm's discount rate is 0.1, and the growth rate of its dividends is 0.05. The next annual dividend is $2, to be paid one year from now. What is the stock price?

Answer 1

Use the Dividend Discount Model.

Price = Next Annual Dividend / (Discount Rate - Growth Rate)

Price = 2 / (0.1 - 0.05)

Price = 2 / 0.05

Price = $40

Let me know if that makes sense.