Constant Growth Model

Constant Growth Model

Why do stock prices change? Suppose the expected D1 is $2, the growth rate is 5 percent and the required rate of return is 10%

Using the constant growth model, what is the price?

What is the impact on stock price if the growth rate is 4% or 6%? If rate of return is 9% od 11%?

Company C will have earnings per shate of $500 this year It pays a dividend equal to 40% of net income and dividends will grow by 25% next year and 20% the year after In subsequent years, it is expecting to return to it’s historical constant growth rate of 5% per year The relevant discount rate for this company is 10%

A What are the projected level of dividends for years, 1,2, and 3?

B What is the value of stock in the year 2?

C What is the value of stock today (Assume Do has been paid out)

Solution: