Question

YA Msafer recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should YA Msafer common stock sell for today if her required return is 10.5%?

Please Solve As soon as
Solve quickly I get you two UPVOTE directly
Thank's
Abdul-Rahim Taysir

Answer 1

In order to value a stock present value of the future payments is required to be calculated. It is given in the question that:

Dividend (D₀) recently paid = $2

Growth rate for Period 1 (g₁) = 20%

Growth rate for Period 2 and 3 (g₂) = 12%

Growth rate after that (g) = 6%

D₁ = D₀(1+g₁) = 2 (1+0.2) = 2.4

D₂ = D₁ (1+g₂ ) = 2.4 (1+0.12) = $2.688

D₃ =D₂(1+g₃ ) = 2.688 (1+0.12) = $3.010

D₄ = D₃ (1+g) = 3.010 (1+0.06) = $3.191

Required return (r) = 10.5%

The following formula shall be used to calculate the sale price of the common stock:

The above formula can be used to calculate the sale price, but first the last part (in blue) needs to be calculated first:

Now, the value of P₃ has been calculated, Substituting the values in the formula of the stock:

rounded off to :

The stock should be sold for $59.16