Hello Everybody,

I'm stuck on this problem and I'd like to know if I'm on the right track.

For a constant growth stock, and assuming a growth rate of 10%, and a company is retaining 15% of those profits and paying shareholders an additional 6% (dividend growth rate) per year in dividends. The current dividend per share is $8.00, what would the value of the dividend be in five years.

My answer

A. Year 1 = 8.00 x 1.05= 8.40
Year 2 = 8.40 x 1.05 = 8.82
Year 3 = 8.82 x 1.05 = 9.26
Year 4 = 9.26 x 1.05 = 9.72
Year 5 = 9.72 x 1.05 = 10.21

hi I'm new but my mums an accountet and I think your answers are 8.50 8.92 9.36 9.72 10.31 I am not 100% sure but I think they are along the right track beause what I did is add up 10%+15%+6% and that = 31% so try and work on those lines OK byiki

You need to use Gordon's growth model which is a widely used dividend discount model to solve this problem. It assumes that dividends will increase at a constant growth rate (less than the discount rate) forever. The valuation is given by the formula:

P = D [(1+g)/(k-g)]

where,

P = estimated price
D = recent dividned
g = growth rate of dividends
k = discount rate