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D1 =D0 (1+g)
=$1.00 X (1+0.07)
=$1.07
D1
P0
k g
Po = $1.07 / (0.15-0.07)
= $13.38
10-3
Dividend Discount Model
Implications of constant growth
Stock prices grow at the same rate as
the dividends
Stock total returns grow at the required
rate of return
Growth rate in price plus growth rate in
dividends equals k, the required rate of
return
A lower required return or a higher
expected growth in dividends raises
prices 10-4
Dividend Discount Model - Example
D1
P0
kg
Price for next year
= $1.07 (1.07) / (0.15-0.07)
= $14.31
Po = $1.10 / (0.15-0.10)
= $22.00 (previously was 13.38)
10-6
Dividend Discount Model
D1
P0
kg
10-7
Exercise
Share price = $8.00
Last dividend = $1.20
Constant growth = 5%