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Estimating Stock Value Using Dividend Discount Model with Increasing Perpetuity Kellogg pays $3
Estimating Stock Value Using Dividend Discount Model with Increasing Perpetuity Kellogg pays $3.50 in annual per share dividends to its common stockholders, and its recent stock price was $93.80. Assume that Kellogg's cost of equity capital is 5.0%.
Estimate Kellogg's expected growth rate based on its recent stock price using the dividend discount model with increasing perpetuity. Do not round until your final answer. Round answer to one decimal place (ex: 0.0245 = 2.5%).
Expert Solution
Computation of Kellogg's Expected Growth rate:
Current Stock Price = Dividend for Next year/(Cost of Equity Capital - Growth Rate)
$93.80 = $3.50*(1+Growth Rate)/(5.0% - Growth Rate)
$93.80*(5.0% - Growth Rate) = $3.50*(1+Growth Rate)
$4.69 - 93.80*Growth rate = $3.50 + 3.50*Growth rate
4.69 - 3.50 = 3.50*Growth rate + 93.80*Growth rate
1.19 = 97.30 * Growth Rate
1.19/97.30 = Growth Rate
Growth Rate = 0.01223 or 1.2%
So, Kellogg's expected growth rate is 1.2%.
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