an investor with a chain of gym clubs just paid a dividend of$2 per share. The f

Question

an investor with a chain of gym clubs just paid a dividend of$2 per
share. The firm’s dividend is
expected to grow at a constant rate of 5% per year, and investorsrequire a 15
% rate of return on the stock.


Return to the original 15% required rate of return and
assume the dividend growth rate is estimated to increase to7% per year, what would be
stock value?
an investor with a chain of gym clubs just paid a dividend of$2 per
share. The firm’s dividend is
expected to grow at a constant rate of 5% per year, and investorsrequire a 15
% rate of return on the stock.

Explanation / Answer

Price of stock P0 = D0*(1+g)/(Ks-g) = 2*(1+5%)/(15%-5%) =2*1.05/10% = $21
So Stock value is $21 b. When growth rate increase to 7% ie g= 7%
Price of stock  P0 = D0*(1+g)/(Ks-g) =2*(1+7%)/(15%-5%) = 2*1.07/10% = $21.40

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