Question

Summit Systems will pay a dividend of $ 1.45 this year. If you expect​ Summit's dividend to grow by 5.9 %per​ year, what is its price per share if the​ firm's equity cost of capital is 10.2 %?

Answer 1

Ans :

8. According to Gordon Growth Model,

P = D1 / (r-g)

P = Current stock price = ?

r = cost of capital = 10.2%

g = growth rate = 5.9%

D0 = Dividend paid = $ 1.45

D1 = Dividend payable one year from now = $ 1.45

P = $ 1.45 / (10.2% - 5.9%)

= $ 1.45 / (4.3%)

= $ 33.72