Discounted Dividend Valuation for Stock XYZ

Very Easy Equity Valuation Applications Discounted Dividend Valuation

Alex is considering investing in Stock XYZ, which is expected to pay a dividend of $2 per share next year. He believes that the dividends will grow at a constant rate of 5% per year indefinitely. Alex wants to determine the maximum price he should be willing to pay for this stock if he requires a 10% rate of return on his investment. To find the intrinsic value of the stock using the Discounted Dividend Valuation model, what should Alex calculate?

The net present value of the expected dividends over the next 10 years.

The dividend discount model formula: D1 / (r - g).

The expected growth rate of the dividends.

Hint

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