Financial management MBA

Question

If a firm's discount rate is 0.1, and the growth rate of its dividends is 0.11. The next annual dividend is $2, to be paid one year from now. 

Q1. Can you use the growing perpetuity formula to calculate the stock price?

Q2. What would be the price of the stock if such stock exists?

Answer 1

1. No, growth perpetuity formula cannot be used. Since discount rate is 10% and growth rate is 11%.

Since discount rate < Growth rate

In such a case it will result in negative value of stock.

2. Price of stock = (D1/ke-g)+g

= (2/0.1-0.11)+0.11 = -199.89