Stock ABC has the following characteristics:
Current dividend $1.00 -
Expected dividend in 1 year $1.10
Long term growth rate of dividends 10%
Required rate of return 12%
Using the infinite period Dividend Discount Model, what is the maximum price that you would pay for stock ABC?
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A. B. C. D. E. F.C
The infinite period Dividend Discount Model indicates that:
Value = (Dividend for period 1)/(k-g) where k is the required rate of return and g is the growth rate. In this case, Value = ($1.10)/(.12-.10) = $1.10/.02 = $55.