Quick question, I am used to the formula that D(1+g) / (r-g) However I have found some problems where the answer explanation shows the Dividend without multiplying it by the growth rate. One example is below :
Schweser page 130 Equity book question # 17 ) Viking Insurance forecasts earnings next year of $4.5. Viking has a dividend payout ratio of 40%. The required return is 15%. Return on Equity is 8.33%. The present value of growth opportunities and the value of the stock based on the Gordon Growth method is closest to:
Disregarding the PVGO I am concentrating on valuing the stock… I calculated the dividend to be $1.8 (.4 X 4.5) and the growth to be .05 (15% X 8.3%). So I look to value the stock by multiplying the dividend by the growth rate and doing the gordon growth model. However the answer key shows that it does not multiply the dividend by the growth rate. Does anyone have an explanation for this, what am I missing?
Thanks for your help and reading through my question!