How to Calculate Stock Price

We can calculate the stock price of a company by using the Constant Growth Stock Valuation formula, which is shown below:
Po = D1 / ( r - g )
and  D1 = D0 (1 + g)

where:
P0: Stock price
D0: Last dividend
D1: Next dividend
g: Growth rate in dividends
r: Rate of Return on the stock
Note: When using this formula, we assume that the company has a constant growth rate.

Example:
Find the stock price of a company, given that the current dividend is $3.00 per share, and the dividends are expected to grow at a constant rate of 5% in the future, and the required rate of return is 9%.

Solution:
D1 = D0 (1 + g)
D1 = $3.00 ( 1 + 0.05)
D1 = $3.00 (1.05)
D1 = $3.15

Po = D1 / ( r - g )
Po = $3.15 / (0.09 - 0.05)
Po = $3.15 / 0.04
Po = $78.75 (Stock Price)

* Next: How to Calculate Share Dividend
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