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Suppose a REIT pays out a dividend today of $3.00 and the projected dividend growth rate is 2%. The investor has a required rate of return/discount rate of 5%. According to the Gordon dividend discount model, what is the REIT’s stock worth today?

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jepessoa

Answer:

current stock price = $153

Explanation:

P₀ = Div₁ / (Re - g)

  • P₀ = current price = ?
  • Div₁ = next years's dividend = $3.00 x 1.02 = $3.06
  • Re = cost of equity = 5%
  • g = growth rate = 2%

P₀ = $3.06 / (5% - 2%) = $3.06 / 3% = $153

current stock price (P₀) = $153

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