Question

Hewlett Packard recently paid a dividend of $2.50 for 2016, and going forward, their dividend is expected to grow at 3 percent per year for the next 5 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assuming a 10 percent required rate of return, compute that value of a share of common stock for HP.

Answer 1

Step-1:Calculation of present value of next 5 years dividend
Year	Dividend	Discount factor	Present value
a	b	c=1.10^-a	d=b*c
1	$       2.58	0.909091	$       2.34
2	$       2.65	0.826446	$       2.19
3	$       2.73	0.751315	$       2.05
4	$       2.81	0.683013	$       1.92
5	$       2.90	0.620921	$       1.80
Total			$    10.31
Working:
Dividend of Year:
1	=	$       2.50	x	1.03	=	$       2.58
2	=	$       2.58	x	1.03	=	$       2.65
3	=	$       2.65	x	1.03	=	$       2.73
4	=	$       2.73	x	1.03	=	$       2.81
5	=	$       2.81	x	1.03	=	$       2.90
Step-2:Calculation of present value of dividends after year 5
Present value		=	D5*(1+g)/(K-g)*DF5			Where,
		=	$    47.69			D5	$       2.90
						g	6%
						K	10%
						DF5	0.620921
Step-3:Calculation of current stock price of stock
As per dividend discount model, current share price is the present value of future dividends.
Present value of future dividends		=	$    10.31	+	$    47.69
		=	$    57.99
So, current value of a share is $ 57.99