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Oriole Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years....

Oriole Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 5 percent. If the required rate of return is 17.50 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Current value $enter the current value of the stock rounded to 2 decimal places

Solutions

Expert Solution

Computation of share price
i ii iii iv=ii+iii v vi=v*iv
year Dividend Terminal value Total cash flow PVIF @ 17.5% present value
1         5.00         5.00 0.851064         4.26
2         6.25         6.25 0.72431         4.53
3         4.70         4.70 0.616434         2.90
4         3.00       25.20       28.20 0.524624       14.79
Price =       26.47
Computation of terminal value = expected dividend in year 3/(required rate - growth rate)
=3*105%/(17.5%-5%)
25.2
answer = $   26.47

ekkarill92 answered 2 years ago
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