A10. (Dividend discount model) Assume RHM is expected to pay a totalcash dividen

Question

A10.

(Dividend discount model) Assume RHM is expected to pay a totalcash dividend of $5.60 next year and its dividends are expected togrow at a rate of 6% per year forever. Assuming annual dividendpayments, what is the current market value of a share of RHM stockif the required return on RHM common stock is 10%?

A10.

(Dividend discount model) Assume RHM is expected to pay a totalcash dividend of $5.60 next year and its dividends are expected togrow at a rate of 6% per year forever. Assuming annual dividendpayments, what is the current market value of a share of RHM stockif the required return on RHM common stock is 10%?

Explanation / Answer

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Expected Dividend(D1) $5.60 Dividend Growth Rate (g) 6% Required Rate of Return (R) 10% Current Market Value of a share(P0)

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Calculating Current MarketValue of Stock: Current Market Value ofStock (P0) = D1 / (R -g) Current Market Value ofStock (P0) = $5.60 / (0.10 - 0.06) Current Market Value ofStock (P0) = $140

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