12 Dividend discount model Using the following data provided

12. Dividend discount model: Using the following data provided, calculate the current price of these stocks assuming an investor required rate of return of 7%. Dividend Growth = Year X Dividend / (Year X - 1 Dividend) - 1

Company

Next year’s dividend

Next year’s expected price

Current value

Alfred Publishing

$0.45

$22.00

Aldo Food Market

$1.75

$48.00

ABC Warehouse

$2.80

$72.00

Anderson Windows

$20.00

$1000.00

Solution

Current value=Future dividend*Present value of discounting factor(7%,time period)

Alfred Publishing:

Current value=0.45/1.07+22/1.07

=$20.98(Approx).

Aldo Food Market:

Current value=1.75/1.07+48/1.07

=$46.50(Approx).

ABC Warehouse:

Current value=2.80/1.07+72/1.07

=$69.91(Approx).

Anderson Windows:

Current value=20/1.07+1000/1.07

=$953.27(Approx).