The concept of zero growth dividends model is that dividend will not grow, they are constant. In order words, there will be a constant non-growing dividend stream. Following is the formula for Zero Growth Dividends:
When company expects that dividend will grow after certain period than the following formula will be used:
Formula:
Price of stock = Divided / (Required rate of return - Growth rate)
P1 = D0 / (ke - g)
Since, this is Zero Growth Dividends, we will not be using next year dividend.
P1 = D0 / (ke - g)
P1 = $ 12/ (0.135 - 0.05)
P1 = $ 141.17
Now we will be discounting this amount to the present value (time 0 to 6 years)
$ 141.17/1.135^6 = $ 66.033
Constant Growth Dividends: Problems 1, 7 and 9 on page 260
The concept of constant dividend growth model is that dividends would be growing at a steady rate i.e. growth rate which is always less than required rate if return. The following formula is used for b)Constant Growth Dividends.
Problems 1:
Using Constant Growth Dividends Formal is as followed:
Dividend
1.45
Growth rate
6%
Required rate of return
11%
Price
?
The Jackson-Timberlake Wardrobe Co. stock, what is the current price?