DIVIDEND DISCOUNT MODEL

[Muhammad Tayyab Shahzad]

Company A is currently selling for Rs. 90 and paying dividend of Rs. 10 per share.
Dividend is expected to grow at rate of 5 percent per year. The required rate of return for
investors is 17% to invest in the stock with the degree of riskness.
Company B is currently selling for Rs. 85 and paying dividend of Rs. 10 per share. For
the next year dividend is Rs. 10.6 per share, which shows growth rate of 6 percent per
year. The required rate of return for investors is 17% to invest in the stock with the
degree of riskness.
A) Calculate the price of stock for Company A and Company B using Dividend Discount
Model.
B) If you have to choose one of these two stocks, which stock you will buy?

[noman]

Formula is

D(1+g)/r-g

for company A..

D=10, r=.14 g=.05

[Nauman]

This is a very simple question, use the formula given by Noman above, but remember to use ex div price in case of Company B, since dividend for next year has been announced and the price given is cum-div price.