Present Value with Constant Growth Rate

Present Value with Constant Growth Rate

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Present value with constant growth rate is often applied to find present value or current price of ordinary share (common stock).

Which

• C₀ : base amount at the beginning of period 1 (Period 0) for constant growth rate
• g: constant growth rate

Question

Mr. BB want to invest stocks from NNM Company. Suppose that the dividend growth rate is 10 percent, the discount rate is 8 percent, there are 20 years of dividends to be paid, and the current dividend is $10. what is the value of the stock based on the constant growth model?

Solution

_Co = $10 , g=10% ,r=8%  and T=20 year, so

          PV = $243.86

          Thus, the price should be $243.86