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dattiger dattiger
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11 years ago
I have an assignment and the instructions are to price a stock based on the expected return and dividend yield. The dividends is growing at a rate of 14% per annum while the expected return is just 11.5%. I am unable to use the basic growth model as r < g.

Any help is appreciated.
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wrote...
#1
11 years ago
Did they give you anything else, like the actual dividend in $?
wrote...
#2
11 years ago
First off, you obviously can't expect dividends to grow at 14% forever and yet have a cost of equity of 11.5%.  That just makes no sense.  Ususally when dividend growth exceeds cost of equity then people use multi-stage models where they say that dividend growth rate slows down to some stable value at some point in the future.  

Ultimately, it might just be that DDM is not an appropriate way to price this stock.
wrote...
#3
11 years ago
They're probably trying to teach you the two stage dividend growth model, isn't there a second long term growth rate mentioned?
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