Contact Corporation just paid a dividend of $1.50 per share. The company expects that the dividend...

Contact Corporation just paid a dividend of $1.50 per share. The company expects that the dividend will grow at a rate of 10% for the next two years. After year two it is expected that the dividend will decline at a rate of 3% indefinitely. If the required return is 12%, what is the value of a share of stock?

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Expert Solution

Contact Corporation
Stock Valuation
Particulars	Year 0	Year 1	Year 2
Current Dividend /share	$ 1.50
Year 2 & Yr 3 dividends with 10% growth		$ 1.65	$ 1.82
Terminal Value of future dividends at Yr 2
g=Grwoth rate =-3%
D0=dividend paid in Year 2=1.82
Required return=k=12%
Terminal Value=D0(1+g)/(k-g)=1.82*(1-3%)/(12%+3%) =			$ 11.77
Future Dividends+Terminal values		$ 1.65	$ 13.58
PV discount factor @12%=		0.8929	0.7972
PV of Future dividends+Terminal value=		$ 1.47	$ 10.83
Sum of PV of Future dividends+Terminal value=	$ 12.30

So current Value per share =	$ 12.30

jeff jeffy answered 1 year ago

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