71 Dividend Discount Model According to the 2015 Value Line

7.1 Dividend Discount Model. According to the 2015 Value Line Investment Survey, the dividend growth rate for ExxonMobil (XOM) is 6 percent. Find the current stock price quote and dividend information at finance.yahoo.com. If this dividend growth rate is correct, what is the required return for ExxonMobil? Does this number make sense to you?

7.2 Stock Quotes. What is the most expensive publicly traded stock in the United States? Go to finance.yahoo.com and enter BRKA (for Berkshire Hathaway Class A). What is the current price per share? What is the 52-week high and low? How many shares trade on an average day? How many shares have traded today?

7.3 Supernormal Growth. You are interested in buying stock in Coca-Cola (KO). You believe that the dividends will grow at 15 percent for the next four years and level off at 6 percent thereafter. Using the most recent dividend on finance.yahoo.com, if you want a 12 percent return, how much should you be willing to pay for a share of stock?

Solution

7.1: g = 6%.

Current stock price of ExxonMobil = $82.33 (at NYSE) (from Yahoo finance)

Current dividend for ExxonMobil = $3.28 (from Yahoo finance)

Thus D1 (dividend for next year) = 3.28*(1+6%)

= 3.4768

As per dividend discount model Current price = D1/(r-g)

82.33 = 3.4768/(r-6%)

or r-0.06 = 3.4768/82.33

or r-0.06 = 0.04223

or r = 0.1022

Thus required rate of return for Exxon Mobil = 0.1022 or 10.22%