Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:**Stock Valuation Problem**
Nuts Incorporated is projected to distribute annual dividends of $3.33 and $4.44 at the end of the next two years, respectively. Following these two years, the company anticipates paying a constant dividend of $4.66 per share. The question is: What is the value of this stock if the required return is 10.8 percent?
**Options:**
- $27.11
- $28.05
- $28.23
- $28.36
- $31.08
Expert Solution
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Step 1: Introduction:
The constant growth model is a stock valuation method used in finance to determine a stock's intrinsic value based on dividends. The model assumes that dividend growth will continue at a steady rate. It might not be appropriate for businesses with unpredictable dividend payout schedules, and the correctness of the model depends on the consistency of the growth rate assumption. This concept only applies to dividends with a constant growth rate. Or, more precisely, it is only relevant for stocks of companies with stable growth rates in dividends per share.
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