Answered: What is the present value of the firm’s…

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Finance

What is the present value of the firm’s stock under the Dividend Discount Model?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 5P: A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s...

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Concept explainers

Stock Yields

The stock yield is otherwise known as the dividend yield. The dividend yield is an annual payment of the stock dividends to the holder of a firm’s stock. The dividend yield is a financial ratio to measure the value of dividend payout every year for the relative stock price. The yield of a stock is usually shown in a percentage that discloses the expected future earnings from stock depending on the current stock price in the future. Stock yield will change depending on the market fluctuations and in accordance with the market fluctuations, the dividends will be increased or decreased by the firm.

Question

Assume Silvio’s Steakhouse pays the dividend of $3.61 this year. For the next 30 years, the firm’s dividend will grow by 5.4%, then it will grow by 4.8% each year afterwards. The required rate of return for the firm’s industry is 11.6%. What is the present value of the firm’s stock under the Dividend Discount Model?

Group of answer choices

$50.32

$10.02

$55.33

$60.33

Definition Definition Quantifiable approach used to anticipate the stock price of a company by discounting all of its future dividend payments. According to this model, the present value of the stock is worth the sum of discounted future dividend payments and the intrinsic value of the stock.

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