Suppose NoGro, Inc. has just issued a dividend of $2.90 per share. Subsequent dividends will remain at $2.90 indeﬁnitely. Returns on the stock of ﬁrms like NoGro are currently running 15%.
What is the value of one share of stock?

Question

Quizplus · Accepted Answer

The value of a share of stock can be calculated using the constant dividend growth model: 
Value of share = D/(r-g) 
where D is the annual dividend, r is the required rate of return, and g is the expected constant growth rate of dividends. In this case, D = $2.90 and g = 0% (since subsequent dividends will remain at $2.90 indefinitely). 
Plugging in the numbers, we get: 
Value of share = $2.90/(0.15-0) = $19.33 
Therefore, the value of one share of stock is $19.33.