dividends to grow at a constant rate

[financialpassion]

Can you share your thoughts

Analysts expect Company Z’s dividends to grow at a constant rate of 5% per year. The firm is just about to pay a dividend amount equal to $10. Let the discount rate be 8% per year. What is the current stock price?

–

I made the following P= 10/ (.0.08-0.05) =333.3 i dont’t not if i have to add another 10$ since the dividend is about to be paid

what is your view on that??

thank you!.

[cgrady40]

I don’t think so, I think you have it.

hopefully someone else will chime in though as im not positive

[Would_You_Look_at_Th]

The constant growth DCF is P0= D1/(k-g) - you need to grow the $10 dividend by 5% since it is considered D0.

So, P0 = (10*1.05) / (.08 - .05) = $350

[S2000magician]

@Would_You_Look_at_Th

The constant growth DCF is P0= D1/(k-g) - you need to grow the $10 dividend by 5% since it is considered D0.

So, P0 = (10*1.05) / (.08 - .05) = $350

But this assumes that D0 has just been paid (so the purchaser of the stock wouldn’t get the $10 dividend); the question says that it is about to be paid (so the purchaser of the stock will get the $10 dividend).

financialpassion: I’d suggest putting this into Excel: list the dividends (growing annually) for, say, the next 200 years, discount them back to today, and add up the present values. That’ll give you the correct answer. Then use the Gordon Growth Model formula and see what inputs you need to arrive at the same answer. You’ll learn a lot more doing this than you will by reading our answers here.

[Would_You_Look_at_Th]

@S2000magician

financialpassion: I’d suggest putting this into Excel: list the dividends (growing annually) for, say, the next 200 years, discount them back to today, and add up the present values. That’ll give you the correct answer. Then use the Gordon Growth Model formula and see what inputs you need to arrive at the same answer. You’ll learn a lot more doing this than you will by reading our answers here.

Not trying to be argumentative. This is more of a clarifying question. But, aren’t you, too, making an assumption as to when the first dividend is going to be paid in your solution?

[S2000magician]

@Would_You_Look_at_Th

@S2000magician

financialpassion: I’d suggest putting this into Excel: list the dividends (growing annually) for, say, the next 200 years, discount them back to today, and add up the present values. That’ll give you the correct answer. Then use the Gordon Growth Model formula and see what inputs you need to arrive at the same answer. You’ll learn a lot more doing this than you will by reading our answers here.

Not trying to be argumentative. This is more of a clarifying question. But, aren’t you, too, making an assumption as to when the first dividend is going to be paid in your solution?

Nope; I’m quoting the problem as given: “The firm is _ just about to pay _ a dividend amount equal to $10.” (Emphasis added.)

[India_28]

This is a professor’s note in Schweser’s, hope it helps When doing stock valuation problems on the exam, watch for words Like "forever, " "infinitely, " "indefinitely, " “for the foreseeable future, " and so on. This wiLL tell you that the Gordon growth model should be used. Also watch for words Like 'Just paid” or "recently paid. " These wiLL refer to the Last dividend, D 0 . Words Like “wiLL pay” or “is expected to pay” refer to D1 .

[NANA_Hachiko]

@S2000magician

@Would_You_Look_at_Th

The constant growth DCF is P0= D1/(k-g) - you need to grow the $10 dividend by 5% since it is considered D0.

So, P0 = (10*1.05) / (.08 - .05) = $350

But this assumes that D0 has just been paid (so the purchaser of the stock wouldn’t get the $10 dividend); the question says that it is about to be paid (so the purchaser of the stock will get the $10 dividend).

financialpassion: I’d suggest putting this into Excel: list the dividends (growing annually) for, say, the next 200 years, discount them back to today, and add up the present values. That’ll give you the correct answer. Then use the Gordon Growth Model formula and see what inputs you need to arrive at the same answer. You’ll learn a lot more doing this than you will by reading our answers here.

s2000 is correct, i would assume $10 is D1 and would not add another 5% on top of that.

The questions aren’t supposed to be tricky, and i think if you think too much, you will likely misinterpret the questions.

if they say “about to pay”, meaning it hasn’t happened yet, it probably refers to D1.