Alexander corp. will pay a dividend of $2.90 next year. The company has stated that it...
Alexander corp. will pay a dividend of $2.90 next year. The company has stated that it will maintain a constant growth rate of 5.25 percent a year forever. If you want a return of 18 percent, how much will you pay for the stock?
Homework Answers
Since the company has stated it will maintain a constant growth rate, we will apply the Gorden Model (also known as the Dividend Discount Growth Model to calculate the share price.
According to Dividend Discount Growth Model, the price of a share is equal to the present value of growing perpetuity where growth rate is constant.
Price of the stock = D1 / (K - g)
where,
D1 = Dividend for next year
K = Required rate of return
g = constant growth rate
Hence,
Value of the stock = $ 2.90 / (18%-5.25%)
= $ 2.90 / 12.75%
= $ 22.75
Thus, we will pay $ 22.75 for the stock
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