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 $5\mathrm{.}0\%6.$

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

s

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?

OThe 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.$

OThe estimated price is substantially higher than its recent market price of $582\mathrm{.}50.$ 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.$

OThe 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.$

OThe 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.$