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Dividend Discount Model

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Simtek currently pays a $2.50 dividend (Do) per share. Next year's dividend is expected to be $3 per share. After next year, dividends are expected to increase a a 9 percent annual rate for three years and a 6 percent annual rate thereafter.

a. What is the current value of a share of Simtek stock to an investor who requires a 25 percent return on his or her investment?
b. If the dividend is year 2 is expected to be $3 and the growth rate over the following three years is expected to be only 7 percent and then 6 percent thereafter, what will the new stock price be?

The Seneca Maintenance Company currently (that is, as of year 0) pays a common stock dividend of $1.50 per share. Dividends are expected to grow at a rate of 11 percent per year for the next four years and then to continue growing thereafter at a rate of 5 percent per year. What is the current value of a share of Seneca common stock to an investor who requires 24 percent rate of return?

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Solution Summary

The solution gives an example of stock valuation based on dividend discount model.

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