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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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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 2 years ago
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