A stock will pay an annual dividend next year of $5 per share. Dividends will grow...

A stock will pay an annual dividend next year of $5 per share. Dividends will grow at 30% for the following 2 years and then at 5% thereafter. What is V₀ if K=0.1?

Expert Solution

V0 is $149.59

Working:

As per dividend discount method, current share price is the present value of future dividends.

Step-1:Present value of dividend of next 3 years

Year	Dividend	Discount factor	Present value
a	b	c=1.1^-a	d=b*c
1	$ 5.00	0.909091	$ 4.55
2	$ 6.50	0.826446	$ 5.37
3	$ 8.45	0.751315	$ 6.35

Total			$ 16.27

Working;

Dividend of Year :

1					=	$ 5.00
2	=	$ 5.00	*	1.3	=	$ 6.50
3	=	$ 6.50	*	1.3	=	$ 8.45

Step-2:Calculation of terminal value of dividend at the end of year 3

Terminal value	=	D3(1+g)/(Ke-g)DF3		Where,
	=	$ 133.32		D3(Dividend of year 3)	=	$ 8.45
				g (Growth rate in dividend)	=	5%
				Ke (Required return)	=	10%
				DF3 (Discount factor of year 3)	=	0.751315


Step-3:Sum of present value of future dividends

Sum of present value of future dividends	=	$ 16.27	+	$ 133.32
	=	$ 149.59

jeff jeffy answered 1 month ago

A stock expects to pay a dividend of $3.72 per share next year. The dividend is...

A stock expects to pay a dividend of $3.72 per share next year. The dividend is expected to grow at 25 percent per year for three years followed by a constant dividend growth rate of 4 percent per year in perpetuity. What is the expected stock price per share 5 years from today, if the required return is 12 percent?

A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever.

A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever. What is the rate of return required by investors? Answer: 14.5%

A stock is expected to pay a dividend of $2.74 per share next year, $3.2 two...

A stock is expected to pay a dividend of $2.74 per share next year, $3.2 two years from now, and $3.38 three years from now. After that, the dividend is expected to grow at a constant rate of 5% per year indefinitely. The required return on the stock is 9%. The estimated price per share is $___________. Rounding and Formatting: Do not enter a dollar sign in your response. Round your answer to 2 decimal places. Example: If your answer...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5%...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5% forever. What is the value of this promised dividend stream if the discount rate is a) 8% b) 5% c) 3%

A firm is expected to pay a dividend of $10 next year and afterwards dividends are expected to grow at 3% per annum in perpetuity.

A firm is expected to pay a dividend of $10 next year and afterwards dividends are expected to grow at 3% per annum in perpetuity. Assume the firm's required rate of return is 5%. a. What should be its stock price?b. A second firm that is expected to pay also a dividend of $10 next year has the same stock price as the first. However, after analyzing the financial statements of this second firm you realize that its dividends are likely...

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $22.50 per share, its last dividend was $1.60, and the company will pay a dividend of $1.68 at the end of the curren

Cost of EquityThe earnings, dividends, and stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $22.50 per share, its last dividend was $1.60, and the company will pay a dividend of $1.68 at the end of the current year.Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.%If the firm's beta is 2.2, the risk-free rate is 6%, and...

Kilsheimer Company just paid a dividend of $5 per share. Dividends are expected to grow at a constant rate of 7% per year.

Kilsheimer Company just paid a dividend of $5 per share. Dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock to you if the required return is 16%? If the stock is trading for $45 in the market, would you want to buy this stock?

ABC stock just paid dividend $0.55 per share, and future dividends are expected to grow at...

ABC stock just paid dividend $0.55 per share, and future dividends are expected to grow at a constant rate of 1.69% every year. The required return for the ABC stock is 20.99%. What is the expected annual dividend amount (per share) ABC stockholders expect to receive next year?

The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year.

The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year. a. If this year’s year-end dividend is $12.00 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM? b. If the expected earnings per share are $18.00, what is the implied value of the ROE on future investment opportunities? (Round your answer to 2 decimal places.) c. How much is the market paying per share for growth opportunities...

FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year. a. If...

FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year. a. If this year’s year-end dividend is $12.00 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM? b. If the expected earnings per share are $18.00, what is the implied value of the ROE on future investment opportunities? (Round your answer to 2 decimal places.) c. How much is the market paying per share for...

Question