Question

The Havard Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.15 in the second year, $4.35 in the third year, and its most recent dividend was $4.58. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock if the required rate of return is 10 percent

Answer 1

$102.34

Step-by-step explanation:

to be able to use the Gordon growth model, we must first determine the growth rate:

(4.15 - 4) / 4 = 3.75%

(4.35 - 4.15) / 4.15 = 4.82%

(4.58 - 4.35) / 4.35 = 5.29%

we can assume that the company will expect the growth rate to be 5.29%

stock price = (dividend + growth rate) / (required rate of return - growth rate)

= ($4.58 x 1.0529) / (10% - 5.29%) = $4.82 / 4.71% = $102.34