Estimating Stock Value Using Dividend Discount Model with Constant Perpetuity

Kellogg pays $2.50 in annual per share dividends to its common stockholders, and its recent stock price was $82.50. Assume that Kelloggs cost of equity capital is 5.0%.

a. Estimate Kelloggs stock price using the dividend discount model with constant perpetuity.

$Answer

b. Compare the estimate obtained in part a with Kelloggs $82.50 price. What does the difference between these amounts imply about Kelloggs future growth?

The estimated price is substantially lower than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit positive future growth and to increase its dividend per share beyond the current $2.50.

The estimated price is substantially higher than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit positive future growth and to increase its dividend per share beyond the current $2.50.

The estimated price is substantially lower than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit negative future growth and to decrease its dividend per share beyond the current $2.50.

The estimated price is substantially higher than its recent market price of $82.50. This means that the market participants expect Kellogg to exhibit negative future growth and to decrease its dividend per share beyond the current $2.50.

Please answer all parts of the question.