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You observe a REIT which currently pays a dividend per share of $3.00. You expect dividends to grow 3.5% and believe the required return for this stock should be 8.75%. Using the Gordon Growth Model, what should be the price per share?

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ahmedgodtrust

Answer:

Current dividend paid (Do) = $3.00

Growth rate (g) = 3.5% = 0.035

Required rate of return (Ke) = 8.75% = 0.0875

Crrent market price (Po) = ?

Po = Do(1 + g)

            ke -g

Po = $3.00(1 + 0.035)

                 0.0875 - 0.035

Po = $3.00(1.035)

                 0.0525

Po = $59.14

Explanation:

The current market price of the stock equals current dividend paid subject to growth rate divided by the excess of required return over the growth rate.

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