Yesterday, Michelin paid a dividend of $2.25 (D0). You are considering buy Michelin stock today. Your required rate of return for their equity is 10% (r). You expect that their dividend will grow at 4% per year (g). Assume that dividends are paid annually. According to the Dividend Discount Model, what should be the price per share of Michelin

$39

Explanation:

The computation of the price per share by using the dividend discount model is shown below:

Price per share = (Next year dividend) ÷ (Required rate of return - growth rate)

where,

Next year dividend is

= $2.25 + $2.25 × 4%

= $2.25 + 0.09

= $2.34

And, the other would remain the same

So, the price per share is

= ($2.34) ÷ (10% - 4%)

= ($2.34) ÷ (6%)

= $39

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