A company currently pays an annual dividend of $6.50 per share. It expects the growth rate of the dividend will be 2.5% (0.025) annually. If the interest (discount) rate is 5% (0.05) what does the dividend-discount model predict the current price of the stock should be?

Question

Quizplus · Accepted Answer

The dividend-discount model (DDM) for a perpetually growing dividend is given by P = D / (r - g), where P is the price, D is the dividend, r is the discount rate, and g is the growth rate. Plugging in the values: P = $6.50 / (0.05 - 0.025) = $6.50 / 0.025 = $260.

A Company Currently Pays an Annual Dividend of $6