Camden Properties has recently paid a dividend of $1. Dividends are expected to grow at a constant rate of 5% thereafter. If the required rate of return is 9%, then what is the current value of the stock?

Question

Camden Properties has recently paid a dividend of $1. Dividends are expected to grow at a constant rate of 5% thereafter.   If the required rate of return is 9%, then what is the current value of the stock?

Quizplus · Accepted Answer

The current value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth) as follows: P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. D1 = $1 * (1 + 0.05) = $1.05, r = 0.09, and g = 0.05. Thus, P = $1.05 / (0.09 - 0.05) = $26.25.

Camden Properties Has Recently Paid a Dividend of $1