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Montgomery Corp. has been paying dividends of $0.90 per share. Assume it has a cost of equity capital of 8.5%. Estimate the stock value per share of Montgomery Corp. using the dividend discount model (DDM) under each of the following separate assumptions:
1) The dividend will continue to stay at $0.90 per share in the future
2) The dividend will be $0.90 for the next two years and then will grow at a rate of 3.5%
(Please show your calculations)

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anthougo

1. The stock value per share of Montgomery Corporation is $10.59 ($0.90/8.5%).

2.  The stock value per share of Montgomery Corporation is $18 ($0.90/ (8.5% -3.5%).

Data and Calculations:

Dividend per share = $0.90

Cost of equity = 8.5%

Growth rate after two years =3.5%

The stock value is determined with the following formula:

P =  D(1)/(r - g)

P = stock price

D (1) = value of next year dividend

r = constant cost of equity capital

g = constant growth rate in perpetuity

Thus, the stock price of Montgomery Corp. will be $10.59 without factoring in the growth rate of 3.5%. The stock price will be $18 per share with the growth rate.

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