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Section: 6 Constant Growth Dividend Discount Model
In the real world, it is unlikely to find a stock with constant dividends and most would experience some level of growth. Assuming that the stock in the above example is likely to experience an annual growth of 3%, it will be valued as:
Po | = |
D1 _______ Ks-g |
||
Po | = |
2.06 __________ 0.12 - 0.03 |
= | SR 22.88 |
Where,
D1 | = | Dividend to be paid in next year; calculated as SR 2 X 1.03 = SR 2.06 |
g | = | Annual growth rate of dividends |