Question

Tyler Inc.'s most recent annual dividend was $3.65 a share. The firm has been growing at a consistent 4% rate for several years, but analysts generally believe better times are ahead and future growth will be in the neighborhood of 5%. The stock is currently selling for $79. Stocks similar to Tyler earn returns ranging from 8% to 10%.

Assuming that instead of rising, Tyler's growth rate remains at 4% or declines to 3%. Round your answers to two decimal places.

A) Calculate value for a share of Tyler at a Growth rate of 3%, interest rate of 9%

B) Calculate value for a share of Tyler at a Growth rate of 3%, interest rate of 10%

Answer 1

a.Current dividend= $3.65

Growth rate= 3%

Interest rate= 9%

The value of the stock is calculated using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Value of the stock today= $3.65*(1 +0.03)/ 0.09 – 0.03

                                              = $3.7595/ 0.06

                                              = $62.66.

b. Current dividend= $3.65

Growth rate= 3%

Interest rate= 10%

The value of the stock is calculated using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Value of the stock today= $3.65*(1 +0.03)/ 0.10 – 0.03

                                              = $3.7595/ 0.07

                                              = $53.71.

In case of any query, kindly comment on the solution.