# GGM

In the following problem, I thought current estimation is 2(1.06)^2/.12-.006. However, solution provides without rising 1.06. If \$2 dividend is last year, we should use next year dividend which is 1.06^2 . right? ---------------------------------------------- The value per share for Burton, Inc. is \$32.00 using the Gordon Growth model. The company paid a dividend of \$2.00 last year. The estimates used to calculate the value have changed. If the new required rate of return is 12.00% and expected growth rate in dividends is 6%, the value per share will increase by: A) 4.17%. B) 4.00%. C) 9.51%. D) 10.42%. Your answer: D was correct! The value per share using the new estimates is \$35.33 = [\$2.0(1.06) / 0.12 - 0.06)] and the percentage increase in the value per share will be 10.42% = [(35.33 - 32.00)/32.00] * 100%

they paid 2\$ div LAST YEAR that is D0 D1=D0+G= 2.12 this is the dividend expected next year you are calculating the dividend Two years from now

D0=2 D1=2.12 GGM = V0= D1/ k-g 2.12/ (.12-.06) = 35.33 V1/V0 = 35.33/32 = 1.1042 = 10.42%

Thanks for replies. I thought last year dividend is not equal D0. I was calculating last year, current year and next year dividends.

Chinni, I remember seeing a similar problem and I did the same thing as you. Thankfully the other answer isn’t an option, or I would’ve gotten it wrong because of the wording.