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Dividend Growth Model - How to Value Common Stock with a Constant Dividend and "No Growth"
This implies that the dividend payout in Year 2 will be the same as the dividend payout in Year 1, and likewise the dividend payout in Year 3 will be the same as in Year 4, thus D remains constant. Therefore, we can tweak this formula to come up with a new common stock valuation formula:
Since the dividend is always the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period, thus the per-share valuation of the common stock is given by this formula:
Where:
As an example, consider Cofta Corp. has a policy of paying $20 per share dividend every year, and the company expects to continue paying out this dividend indefinitely. What will be the value of a common share of stock if the required rate of return is 15%?
What if we knew the dividend for this company always grows at a steady rate every year. We will call this growth rate g. If we let D0 be the dividend just paid, then the next dividend D1 will be:
Where:
Having said this, what is the formula for dividend payout in 2 periods?
We can repeat this process to come up with the dividend at any point in the future. Thus, the dividend Dt in t periods in the future is given by:
Example of Dividend Growth TD Dominion bank has just paid a dividend of $5 per share and the dividend grows at a steady rate of 6% per year. Based on this information, what will the dividend be in 5 years?
Thus in 5 years, the dividend will grow from $5 per share to $6.691 thus growing a total of ($6.691 - $5) = $1.691
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