Kilsheimer Company just paid a dividend of $ 4 per share. Future dividends are expected to grow at a constant rate of 6% per year. What is the value of the stock if the required return is 12 %?
WHICH SECTOR OF THE ECONOMY HAS TYPICALLY BEEN A NET SAVER (MADE UP OF SURPLUS UNITS), HOUSEHOLDS, GOVERNMENT, OR BUSINESS
To calculate the value of the stock, we can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The formula for the Gordon Growth Model is:
Value = Dividend / (Required Return - Dividend Growth Rate)
In this case, the dividend is $4 per share, the required return is 12%, and the dividend growth rate is 6%.
Let's plug in the values to calculate the value of the stock:
Value = $4 / (0.12 - 0.06)
Simplifying further:
Value = $4 / 0.06
Value = $66.67
Therefore, the value of the stock is $66.67 if the required return is 12% and dividends are expected to grow at a constant rate of 6% per year.