You are evaluating a company's stock. The stock just paid a dividend of $1.75. Dividends are expected to grow at a constant rate of 5 for long time into the future. The required rate of return (Rs)on the stock is 12 percent. What is the fair present value?

Question

Quizplus · Accepted Answer

The fair present value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (Rs - g), where D1 is the dividend next year, Rs is the required rate of return, and g is the growth rate. D1 = $1.75 * (1 + 0.05) = $1.8375. P = $1.8375 / (0.12 - 0.05) = $26.25.

You Are Evaluating a Company's Stock