Dividend discount model to value stock

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Reference no: EM131965834

Assume that you are using the dividend discount model (the Gordon Model) to value stock. The stock currently pays no dividends, but expected to begin paying dividends $4 per share in five years.

a) Compute the value of a stock paying no dividends today, but that is expected to pay annual dividends of $4 in five years. At that time dividends are expected to grow at a constant rate of 4.5%, and the firm's cost of equity is 11%. A) $60-$65 B) > $65 C) < $50 D) $55-$60 E) $50-$55

b) If instead, the firm's stock was to pay a constant annual dividend of $4 starting in year 5, how would you value that stock? A) < $18 B) $18-$22 C) $26-$30 D) > $30 E) $22-$26

c) Suppose the stock is expected to grow at a rate of 9% for the next six years that it started paying dividends, then slows to a long-term growth rate of 4.5%, how much is that stock worth today? A) $45-$50 B) > $55 C) $40-$45 D) < $40 E) $50-$55

Reference no: EM131965834

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