The dividend-growth model may be used to value a stock: V = D o (1 + g) k - g A.

Question

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

V = Do(1 + g)

            k - g

A.) What is the value of this stock if:

Do = $2

k = 10%

g = 6%

B.) What is the value of this stock if the dividend is increased to $3 and the other variable remain constant?

C.) What is the value of this stock if the required return declines to 7.5% and the other variables remain constant?

D.) What is the value of this stock if the growth rate declines to 4% 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%, and the required return remains 10%?

I know this is a lot, but please if you can help me answer questions in detail and show all work. I will rgive the best answer a high rating. Thank you:-)

Explanation / Answer

V = D0 (1+g)/(k-g)

A. D0 = 2, k = 10% = 0.10 and g = 6% = 0.06

V = 2 * (1.06)/(0.10-0.06) = 2*1.06/0.04 = $53

B. D0 = 3, k = 10% = 0.10 and g = 6% = 0.06

V = 3*1.06/0.04 = $79.5

C. D0 = 2, k = 7.5% = 0.075 and g = 6% = 0.06
V = 2*1.06/(0.075-0.06) = 2*1.06/0.015 = $141.33

D. D0 = 2, k = 10% = 0.10 and g = 4% = 0.04

V = 2*1.04/(0.10-0.04) = 2*1.04/0.06 = $34.67

E. D0 = 2.30, k = 10% = 0.10 and g = 4% = 0.04

V = 2.30*1.04/(0.10-0.04)=2.30*1.04/0.06 = $39.87

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