What is the value of a stock that paid a $2.00 dividend last year if dividends are expected to grow at 5% forever and the appropriate return on equity is 12%? I used the correct constant growth formula but put in $2.00 for the dividend instead of $2.00*(1.05) = $2.10. Do we just assume that if we’re given a dividend it’s the base year and we have to find the dividend for a year after that? Thanks!
The Gordon Growth formula uses D1: the dividend to be paid next year. You say that the $2.00 dovidend was _ paid _: past tense. Thus, you need to increase it by the annual growth to get the next (as yet unpaid) dividend.