The equation for the Gordon Growth Model is, Gordon Growth Model equation where,

Question

The equation for the Gordon Growth Model is,

Gordon Growth Model equation

where,
P0 = price of the common stock,
D1 = per share dividend expected at the end of year 1,
D0 = most recently paid dividend,
Ks = required return on common stock,
g = growth rate in dividends.

To calculate g, we have to assume that future dividend payments will grow at a constant rate into the future forever. This constant rate can be estimated by examining the average growth rate in the past. On a calculator,

Let,
PV = $ .86,
FV = $2.00,
n = 8.

Solve for i. i = the average growth rate. In this case i = g = Solve for this unknown

Plugging this growth rate into the Gordon Growth Model,

P0 = FV(1 + i)/kj - i = Solve for this stock price

Explanation / Answer

For Gordon Growth model P0   = FV(1+i)/kj - i       For calculating growth rate,                FV   = PV(1+g)^5.                $2.00   = $1.42(1+g)^5                $2.00/$1.42   = (1+g)^5                   (1+g)^5   = $2.00/$1.42                                   = 1.408                      1+g       =1.0708                          g        =0.708                Growth rate is 7.08%. (NOTE: But here for caculation of stock price you didn't give the required rate of return on common stock So please post required rate of return on common stock then only we can calculate the stock price)

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