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29 November, 17:02

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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  1. 29 November, 17:15
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    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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