Sander's Group is expected to pay an annual $2.48 dividend at the end of this year. If you expect Sander's Group's dividend to grow by 5.4% per year forever and Sander's Group's equity cost of capital is 11.1% p.a. (compounded annually), then the value of a share of Sander's Group is closest to?
Question
Sander's Group is expected to pay an annual $2.48 dividend at the end of this year. If you expect Sander's Group's dividend to grow by 5.4% per year forever and Sander's Group's equity cost of capital is 11.1% p.a. (compounded annually), then the value of a share of Sander's Group is closest to?
Solution
The value of a share of Sander's Group can be calculated using the Gordon Growth Model, which is a model used to determine the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is expected in one year, and a dividend growth rate, the model solves for the present value of the infinite series of future dividends.
The formula for the Gordon Growth Model is:
P = D / (r - g)
where: P = price of the stock D = expected dividend per share one year from now r = required rate of return for the equity investor g = growth rate in dividends
In this case:
D = $2.48 (the dividend expected next year) r = 11.1% or 0.111 (the required rate of return) g = 5.4% or 0.054 (the growth rate in dividends)
Substituting these values into the formula gives:
P = 2.48 / 0.057 = $43.51
Therefore, the value of a share of Sander's Group is closest to $43.51.
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