Examine the following stock quote for Citigroup: The expected growth rate of Cit

Question

Examine the following stock quote for Citigroup: The expected growth rate of Citigroup's dividends is 7 percent per year. According to the constant-growth dividend model, what is the stock's required return? Assume that the annual dividend of $1.30 was paid yesterday. Consider the stock of Davidson Company, which will pay an annual dividend of $2 one year from today. The dividend will grow at a constant annual rate of 5 percent, forever. The market requires a 12-percent return on the company's stock. What is the current price of a share of the stock ? What will the market stock price be in 10 years ?

Explanation / Answer

Dividend to be paid (D1) $2 Required rate (Ke) 12% Growth rate (g) 5% Current Price of Share: (P0): D1/(Ke-g) Current Price of Share: (P0): 2/(0.12-0.05) $28.57 Market price in 10 years D11: 2*(1+0.05)^10 $3.26 P10= D11/(Ke-g) P10= 3.26/(0.12-0.05) $46.57

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