Estimating Stock Value Using Dividend Discount Model with Constant Perpetuity

Kellogg pays $$2\mathrm{.}00$ in annual per share dividends to its common stockholders, and its recent stock price was $$82\mathrm{.}50.$ Assume that Kellogg$$s cost of equity capital is $5\mathrm{.}0\%.$

a$.$ Estimate Kellogg$$s stock price using the dividend discount model with constant perpetuity.

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b$.$ Compare the estimate obtained in part a with Kellogg$$s $$82\mathrm{.}50$ price. What does the difference between these amounts imply about Kellogg$$s future growth?

A$)$ The estimated price is substantially lower than its recent market price of $$82\mathrm{.}50.$ This means that the market participants expect Kellogg to exhibit positive future growth and to increase its dividend per share beyond the current $$2\mathrm{.}00.$

B$)$ The estimated price is substantially higher than its recent market price of $$82\mathrm{.}50.$ This means that the market participants expect Kellogg to exhibit positive future growth and to increase its dividend per share beyond the current $$2\mathrm{.}00.$

C$)$ The estimated price is substantially lower than its recent market price of $$82\mathrm{.}50.$ This means that the market participants expect Kellogg to exhibit negative future growth and to decrease its dividend per share beyond the current $$2\mathrm{.}00.$

D$)$ The estimated price is substantially higher than its recent market price of $$82\mathrm{.}50.$ This means that the market participants expect Kellogg to exhibit negative future growth and to decrease its dividend per share beyond the current $$2\mathrm{.}00.$