(Dividend discount Model) Assume RHM is expected to pay a total cash dividend of $56.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%.
Thank you in advance for your response.
To calculate the current market value of a share of RHM stock using the Dividend Discount Model (DDM), you need to follow these steps:
1. Identify the variables:
D1 = Expected dividend payment next year = $56.60
g = Growth rate of dividends = 6% = 0.06
r = Required return on RHM common stock = 10% = 0.10
2. Apply the Dividend Discount Model formula:
V0 = D1 / (r - g)
Where V0 is the current market value of a share of RHM stock.
3. Calculate the value:
V0 = $56.60 / (0.10 - 0.06)
V0 = $56.60 / 0.04
V0 = $1,415
Therefore, the current market value of a share of RHM stock, based on the Dividend Discount Model, is $1,415.