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16 February, 10:21

Suppose Nabisco Corporation just issued a dividend of $1.79 per share yesterday. Subsequent dividends will grow at a constant rate of 7.7% indefinitely. If the required rate of return for this stock is 10.5%, what is the value of a share of common stock today?

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  1. 16 February, 13:07
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    The price of the stock today is $68.85

    Explanation:

    The stock's dividends are expected to grow at a constant rate indefinitely. Such a stock qualifies under the constant growth model of the DDM and the price for such a stock today is calculated using the following formula,

    P0 = D0 * (1+g) / r - g

    Where,

    D0 * (1+g) is D1 that is dividend expected for the next period r is the required rate of return g is the growth rate in dividends

    P0 = 1.79 * (1+0.077) / (0.105 - 0.077)

    P0 = $68.85
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