The dividend-growth model may be used to value a stock: V= D0(1+g) k-g a. What i

Question

The dividend-growth model may be used to value a stock:

V= D0(1+g)
k-g


a. What is the value of a stock if:

D0 = $2
k = 10%
g = 6%

b. What is the value of this stock if the dividend is increased to $3 and other variables remain constant?
c. What is the value of this stock if the required return declines to 7.5 percent and the other variables remain constant?
d. What is the value of this stock if the growth rate declines to 4 percent and the other variables remain constant?
e. What is the value of this stock if the dividend is increased to $2.30, the growth rate declines to 4 percent, and the required return remains 10 percent?

Explanation / Answer

P= Do (1+g)/r-g P= 2*1.06/.10-.06= $53. P= 3*1.06/.10-.06= $79.50 P= 2*1.04/.10-.04=$34.67 P=2.30*1.04/.10-.04= $39.87

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