Hi everyone – hope everyone is grinding hard like me. Does anyone know why you dont use the gordon growth model here? Does it need to say Expected Div Growth Rate forever? Or something along those lines?
Use the following information on Brown Partners, Inc. to compute the current stock price.
Dividend just paid = $6.10
Expected dividend growth rate = 4%
Expected stock price in one year = $60
Risk-free rate = 3%
Risk premium on the stock = 12%
Given explanation: The current stock price is equal to (D1 + P1) / (1 + ke). D1 equals $6.10(1.04) = $6.34. The equity discount rate is 3% + 12% = 15%. Therefore the current stock price is ($6.34 + $60)/(1.15) = $57.70
(Study Session 13, Module 41.2, LOS 41.g)
Related Material SchweserNotes – Book 4