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Use the GCM to find the current stock price for IBM. We will call this the theoretical price or Po.
D1 = D0 x (1 + g) = $0.80 x (1 + 8.2%) = $7.36
CGM: P0 = D1/(ks ? g) =
P0 = $7.36/(17.08% ? 8.2%) = $82.88
5. Now use appropriate Web resources to find IBM's current stock quote, or P. Compare Po and P. Do you see any differences? Can you explain what factors may be at work for such a difference in the two prices?
a. P = $76.28
P0 = $82.88
b. Due to the Constant Growth Model's sensitivity to the discount rate, dividend growth rate and the expected dividend value, any error in estimating these values may give us values for share price, which is very different from the actual share price...
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