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    Stock Valuation: Constant-Growth Model

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    A stock sells for $40. The next dividend will be $4 per share. If the rate of return earned on reinvested funds is 15 percent and the company reinvests 40 percent of earnings in the firm, what must be the discount rate?

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    Solution Preview

    A stock sells for $40. The next dividend will be $4 per share. If the rate of return earned on reinvested funds is 15 percent and the company reinvests 40 percent of earnings in the firm, what must be the discount rate?

    The Dividend Discount Model for constant growth rate of dividends is given by the equation
    Po= Div1/ ...

    Solution Summary

    The discount rate is calculates using Constant-Growth Model.

    $2.19