Value of Common Stock: $97.08

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To determine the value of a common stock using the Infinite Period Dividend Discount Model, use the following equation:

{V = [d1 / (k - g)]}

Where: V = the value of the common stock at t0, d1 = the annual dividend at t1 (which is found by multiplying d0 by (1 + g), k = the investor's required rate of return, and g = the anticipated annual growth rate.

In this example, all of the necessary information has been provided, and incorporating this information into the Infinite Period DDM will lead to the following:

{V = [($1.50 * 1.12) / (0.15 - 0.12] = $56}

This value is significantly less than the price of the shares in the open market. While at first it may be appealing to assume that the common stock is overvalued, this may be a dangerous assumption. Equally likely is the possibility that the Infinite Period DDM is not the ideal valuation model for this common stock. Perhaps the price of this common stock is reflecting other sources of potential cash flows, ratherthan the summation of the present value of future dividends. This is an important point to consider, and one with which you should become familiar.