For year 2017 the company paid 736 million in cash dividends

For year 2017 the company paid 736 million in cash dividends and had 345.6 million shares outstanding. If dividends per share grow at 2.8% every year afterwards (i.e. perpetuity) and an investor\'s required rate of return is 6%, what is the value or price of the stock. If the stock is currently trading for $67 per share would you recommend the investor buy the stock?

Solution

1. Price of the Stock

Using Gordon\'s Dividend growth model

P = D1 / ( r-g )

P = Price of Stock per Share

D1 = Dividend per Share in next Year = Dividend per Share in Current Year X ( 1 + growth rate )

r = return expected by Shareholders = 6 %

g = Growth rate = 2.8 %

Accordingly,

Dividend per Share in Current Year = $ 736 / 345.6 = $ 2.13 per Share

D1 = Dividend per Share in next Year

= Dividend per Share in Current Year X ( 1 + growth rate )

= $ 2.13 X ( 1 + 2.8 % )

= $ 2.19

P = D1 / ( r-g )

= $ 2.19 / ( 6 % - 2.8 % )

= $ 2.19 / 4.8 %

= $ 45.63

2. From above it has seen Stock Price per Share is $ 45.63, but currently trading at $ 67 per Share it

means stock overvalued in market so investor should not buy the stock.