according to the gordon-growth model, what will be the percentage change in the value of the stock of a company whose current dividend is $10 and whose dividends had been expected to grow by 3% per year but now are expected to grow by 1% per year?

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21-10-2022
Business

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according to the gordon-growth model, what will be the percentage change in the value of the stock of a company whose current dividend is $10 and whose dividends had been expected to grow by 3% per year but now are expected to grow by 1% per year?

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febyyyvaalentina febyyyvaalentina · Answer 1 · 2022-10-24T19:33:04-04:00

The percentage change in the value of stock based on Gordon Growth model is -23.7%. The intrinsic stock value that had been expected to grow by 3% per year is 147.14 and 1% per year is 112.22.

The Gordon Growth Model or also known as the dividend discount model can be described as a stock valuation method that calculates a stock’s intrinsic value. This dividend discount model is based on a future series of dividends that grow at a constant rate.

The formula of Gordon Growth model, is:

P = [tex]\frac{D(1+g)}{(k-g)}[/tex]

P = intrinsic stock value

D = current annual dividend per share

k = required annual rate per return

g = annual dividend growth rate

Intrinsic stock value = $10 * (1+3%)/(10%-3%)

Intrinsic stock value = 147.14

Intrinsic stock value = $10 * (1+1%)/(10%-1%)

Intrinsic stock value = 112.22

%Charge = (147.14-112.22)/147.14

%Change = -23.7%

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