Answer to Question #57391 in Economics of Enterprise for klaudia

Question

If a stock is expected to pay a dividend of $50 for the current year, what is the approximate present value of this stock, given at discount rate of 6% and a dividend growth rate of 4%?

Answer 1

The formula for the present value of a stock with constant growth is the estimated dividends to be paid divided by the difference between the required rate of return and the growth rate.
If a stock is expected to pay a dividend of $50 for the current year, then the approximate PV of this stock (discount rate of 6% and a dividend growth rate of 4%) is:

PV = 50/(0.06 - 0.04) = $2,500.