A firm has a constant growth rate of 7%, and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for two years from now based on the dividend discount model.
6.25*(1.07)^3/ (.06)
So you go to the 3rd power, because you discount it by 1 year, so it gives you two years. Can someone please help explain this?
Also, another question. When they ask you about P/E. P is just the payout ratio? and E is just (k-g)? What else could P/E represent?
Finally, for the people using Schweser was Exam 3 afternoon easier than the other exams?? My scores have gone up every exam, starting at 49% for the first exam ( 2 weeks ago), up to 69% for the last one. I am going to start the 2nd set of books tomorrow. Most of my improvement has to do with S2000 and this board, so thanks everyone. I feel like ive learned more this last week than I have the first 4 months.
To find the price at a certain time, you have to take into consideration all the future cash flows. In this case, you are trying to find the price at time 2, therefore you need the dividend at time 3. Since the growth rate is 7%, you multiply the current dividend by the growth rate 3 times.
Are you sure the denominator is 0.06? I think it should be 5%. r – g is 0.12 – 0.7.
P/E is price/earnings. It’s not the payout ratio. If a question gives you the EPS and payout ratio, you multiply them together to get the dividend when calculating using the dividend gordon growth model.
Thanks hei so. I am always confused by this g- it is (1-dividend payout ratio)*ROE, but g is also used as a divided growth rate ratio? Aren’t these 2 conflicting themes for g?