Question
In: Finance
Gloria’s Boutique recently paid $1.65 as an annual dividend. Future dividends are projected at $1.68, $1.73,...
Gloria’s Boutique recently paid $1.65 as an annual dividend. Future dividends are projected at
$1.68, $1.73, $1.75, and $1.80 over the next four years, respectively. Beginning five years from now, the dividend is expected to
increase by 2.5 percent annually. What is one share of this stock worth to you if you require an 11 percent rate of return on similar investments?
a $25.90
b $21.33
c $19.68
Solutions
Expert Solution
Answer:- Correct Answer (c) i.e $ 19.68.
Working:-
| Year | Future Dividends | P.V Factor@11% | Present Value |
| 1 | 1.68 | 0.90 | 1.51 |
| 2 | 1.73 | 0.81 | 1.40 |
| 3 | 1.75 | 0.73 | 1.28 |
| 4 | 1.8 | 0.66 | 1.19 |
| Present value of Future dividends | 5.38 |
Dividends is expected to grow 2.5% foreever from year 5
Therefore, Year 5 dvidend = 1.8 + 1.8*2.5% = $ 1.85
Intrinsic Value at Year 5 = D1 / (Required rate of return - Growth)
= 1.85 / (11%-2.5%) = $ 21.71
Present value of Year 5 Dividend = 21.71 *0.66 = $14.30
Therefore, Share price = $ 5.38 + $ 14.30 = $19.68
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