Question
In: Finance
Stock C is expected to pay a dividend of $5.80 next year. Thereafter, dividend growth is...
Stock C is expected to pay a dividend of $5.80 next year. Thereafter, dividend growth is expected to be 19.00% a year for five years (i.e., years 2 through 6) and zero thereafter.
If the market capitalization rate for each stock is 9.00%, what is the stock price for each of the stock C?
Solutions
Expert Solution
As per dividend discount model (DDM) the price of a stock is the sum of all of its future dividend payments, discounted back to their present value or net present value of all future dividends.
D1 = $ 5.8
D2 = $ 5.1 x 1.19 = $ 6.902
D3 = $ 6.902 x 1.19 = $ 8.21338
D4 = $ 8.21338 x 1.19 = $ 9.7739222
D5 = $ 9.7739222 x 1.19 = $ 11.63096742
D6 = $ 11.63096742 x 1.19 = $ 13.84085123
Present value of all dividends @ 9 % of discount rate:
PV D1 = $ 5.8/ (1.09) = $ 5.321100917
PV D2 = $ 6.902/ (1.09)2 = $ 6.902 x 1.1881 = $ 5.809275314
PV D3 = $ 8.21338/ (1.09)3 = $ 8.21338 x 1.295029 = $ 6.342236351
PV D4 = $ 9.7739222/ (1.09)4 = 9.7739222 x 1.411582 = $ 6.924092897
PV D5 = $ 11.63096742/ (1.09)5 = 11.63096742 x 1.538624 = $ 7.559330778
PV D6 = $ 13.84085123/ (1.09)6 = 13.84085123 x 1.67710 = $ 8.252847363
Price of stock = $ 5.321100917 + $ 5.809275314 + $ 6.342236351 + $ 6.924092897 + $ $ 7.559330778
+ $ 8.252847363 = $ 40.20888362 or $ 40.21
Stock price of each of stock C is $ 40.21
jeff jeffy answered 4 months agoRelated Solutions
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