Practice Problem – Stock Pricing (DDM)

Practice Question

Intro to Finance
Equity Valuation
Dividend Growth Model, Stock Pricing
Short Answer

Calculate the stock price of NIKE Inc. based on the current dividend of $1.3, and a dividend growth rate of 5%. Note that the market risk premium is 9%, RF is 3%, and beta is 0.9.

Answer +
22.380
Explanation +
Step 1: Calculate the Required Rate of Return (CAPM)
\[ k = R_f + \beta (R_m - R_f) \] \[ k = 0.03 + 0.9 \times 0.09 = 0.03 + 0.081 = 0.111 \]
Step 2: Calculate Expected Dividend (D₁)
\[ D_1 = D_0 (1 + g) = 1.3 \times (1 + 0.05) = 1.365 \]
Step 3: Calculate Stock Price Using Gordon Growth Model
\[ P_0 = \frac{D_1}{k - g} = \frac{1.365}{0.111 - 0.05} = \frac{1.365}{0.061} \approx 22.38 \]
Final Answer

The stock price of NIKE Inc. is approximately $22.38.