Assume that shareholder's required rate of return (r) is 9%. Dr. Pepper is expected to pay a dividend of $2.00 per share (D1) next year. Moreover, investors expect dividends to grow at a constant rate of 4% per year (g). According to the Dividend Discount Model, what should be the current price per share of Dr. Pepper?

Question

Lawrence Faulkner

Business

29 June, 17:42

Assume that shareholder's required rate of return (r) is 9%. Dr. Pepper is expected to pay a dividend of $2.00 per share (D1) next year. Moreover, investors expect dividends to grow at a constant rate of 4% per year (g). According to the Dividend Discount Model, what should be the current price per share of Dr. Pepper?

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Answers (1)

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Derick Short · Answer 1

P=$40

Explanation:

We will apply constant dividend growth model that is = P = D1 / (k-g)

P is the price of share?

D1 is the current divided $2

k is the rate of return 9%

G is the constant growth 4%

P=2 / (9%-4%)

P=$40