Ramchander Investment Group is expected to pay dividends of $1.40 next year.The company just paid dividends of $1.30.This growth rate is expected to continue.How much should be paid for Ramchander Investment Group stock just after the dividend if the appropriate discount rate is 10%?

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the value of a stock based on the present value of its future dividends. 
The formula for a constant dividend growth rate is: 
PV = D / (r - g)
PV = Present value of stock
D = Expected dividend next year
r = Required rate of return
g = Expected growth rate of dividends

Plugging in the given values: 
PV = 1.40 / (0.10 - 0.03)
PV = 1.40 / 0.07
PV = $20

Therefore, the stock should be worth $20 just after the dividend is paid.

Ramchander Investment Group Is Expected to Pay Dividends of $1