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XYZ has the following dividend forecast for the next three years: Year 1 2 3 Expected...

XYZ has the following dividend forecast for the next three years: Year 1 2 3 Expected Dividend $1.00 2.00 2.50 After the third year, the dividend will grow at a constant rate of 5 percent per year. The required return is 10 percent. What is the value of the stock today?

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Expert Solution

As per dividend discount method, current value of stock is the present value of future dividend from stock.
Step-1:Calculation of Present value of next three years dividend
Year Dividend Discount factor@10% Present Value
a b c=1.10^-a d=b*c
1 $       1.00 0.9090909 $       0.91
2 $       2.00 0.8264463 $       1.65
3 $       2.50 0.7513148 $       1.88
Total $       4.44
Step-2:Calculation of present value of future dividend at the end of Year 3
Present Value 3 Years from now = D3*(1+g)/(Ke-g) Where,
= 2.50*(1+0.05)/(0.10-0.05) D3 $       2.50
= $    52.50 g 5%
Ke 10%
Step-3:Calculation of present value of step-2 value
Present Value = $    52.50 x (1.10^-3)
= $    52.50 x 0.751315
= $    39.44
Step-4:Calculation of present value of all dividend
Present Value = Present value of next three years dividend + Present Value of after three years dividend
= $       4.44 + $    39.44
= $    43.88
Thus,
Curent Value of stock is $    43.88

jeff jeffy answered 3 years ago
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