From Kaplan:
A firm has a constant growth rate of 7% and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for two years from now based on the dividend discount model?
Answer:
Why is the exponent 3 and not 2, since we are trying to find the value of the equity two years from now?
What’s the formula for the value of equity today?
D sub 0 ÷ Ke = V sub 0
What if g<>0?? You’re on the right track tho…
“What is g <>0?”
I do not understand, please clarify that response.
He means g ≠ 0. He’s handicapped: he speaks Canadian.
Hint: Gordon growth.
Thanks. Once again, why is the exponent 3 and not 2, since we are trying to find the value of the equity two years from now? Isn’t the FV two year from now?
I’m trying to help you discover that.
Using Gordon growth, what’s the value of the stock today?
Ah I get it; with the Gordon growth or multi-stage growth model, when finding the second stage Price of the stock, the Dividend is n+1, or in our case, 2+1 = 3. Ergo, the exponent is 3.
Very good, grasshopper.
Ha! Thank you!
My pleasure.