Question

. Sharon Corporation annolrnced today that it will begin paying annual dividends next year. l-he first dividend w'ill be RM0.12 a share. The fblior,ving dividends will be RMO.l5, RM0.20, RM0.50. and RM0.60 a share annually fbr the tbllowing 4 years, respectively. Afier that, dividends are projected to increase by 4 percent per year. Horv much are you witling to pay to buy one share of this stock today if your desired rate of refurn is 8.5 nercent?

Answer 1

current stock price can be calculated using the following steps :-

1) explicit forcast period (year 1-5)

2) horizon period

3) conclusion

1) explicit forcast period (year 1-5)

re(required return) = 8.5%

Here we can calculate the present value of cash flow for the 5 years using the following formula :-

= {divident(y1) / 1+re¹} + {divident(y2) / 1+re²}+{divident(y3) / 1+re³}+{divident(y4) / 1+re⁴}+{divident(y5) / 1+re⁵}

= (0.12 / 1.085) + (0.15 / 1.085²)+(0.20 / 1.085³)+(0.50 / 1.085⁴)+(0.60* / 1.085⁵)

= 0.11059+0.1274+0.1565+0.36078+0.3990

= 1.15427

PRESENT VALUE FOR 5 YEARS = 1.15427

2) horizon period

growth= 4%

re(required return) = 8.5%

present value at end of 5th year = divident 6th year/ RE-G

=(0.60 * 1.04) / (0.085 - 0.04)

= 0.624 / 0.045

present value at end of 5th year = 13.867

present value at year 0 = 13.867/ (1.085)⁵

= 9.222

3) conclusion

total present value = 1.15427+ 9.222= 10.37627

the answer is 10.37627

…………Hope you are satisfied with the solution provided, kindly support me by rating the answer………....