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Gordon Growth Model: Ameritech Value and Implied Dividend Growth at $80

Use the supplied CAPM inputs to obtain an 11.20% required return, value Ameritech at $65.89, and solve for the 6.46% dividend growth implied by $80.

Question

Ameritech paid a 1992 dividend of $3.56 per share. Assume its dividends grow perpetually at 5.5% annually. Its equity beta is 0.90; the Treasury bond yield is 6.25%; the equity risk premium is 5.5%.

(a) Calculate the per-share valuation with the Gordon growth model.

(b) If a share trades at $80, determine the perpetual dividend growth rate consistent with that price.

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Evidence boundary

This answers both parts of Ameritech problem 2 in the Chapter 13 PDF of Aswath Damodaran’s Investment Valuation, third edition (printed p. 349). The dividend and risk inputs are historical teaching data. CAPM produces the required return from the supplied assumptions; the Gordon model assumes perpetual constant dividend growth with r > g. The $80 price is a problem input, and the calculated growth rate is conditional on that model, not an investment forecast.