Mattel, Inc. was trading at a price of $28.18 per common share at December 31, 2
ID: 2527817 • Letter: M
Question
Mattel, Inc. was trading at a price of $28.18 per common share at December 31, 2015. Using the Gordon growth model, estimate the market’s expected growth in dividends that is required to yield the $28.18 price per common share. Assume that the current dividend per share is $1.52 and is expected to grow thereafter, and that the cost of equity capital is 8.0%. (Hint: Use the equation for the dividend discount model with increasing perpetuity, at the top of page 12-20.)
Round answer to one decimal place (ex: 0.0235 = 2.4%).
Answer%
Explanation / Answer
Answer:-
Gordon growth model - It is a method for calculating the intrinsic value of a stock, exclusive of current market conditions. The model equates the present value of a stock's future dividends.
Value of stock = D1/ (k - g)
where:
D1 = next year's expected annual dividend per share
k = the investor's discount rate or required rate of return
g = the expected dividend growth rate
28.18 = 1.52/(0.08-g)
2.2544-28.18g =1.52
28.18g = 0.7344
g= 0.7344/28.18
g= 2.61%