In: Finance
XYZ company presently pays a dividend of $ 1.50 per share on its
common
stock. The company expects to increase the dividend at a 20% annual
rate the
first four years and at the rate of 13% at the next four years then
the growth on
the dividend at a 7% thereafter. This phased growth patterns is in
keeping with
the expected life cycle of earnings. You are required a 16% return
to invest in
this stock. What value should you place on a share of this
Stock?
Required rate= | 16.00% | ||||||
Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 1.5 | 20.00% | 1.8 | 1.8 | 1.16 | 1.5517 | |
2 | 1.8 | 20.00% | 2.16 | 2.16 | 1.3456 | 1.60523 | |
3 | 2.16 | 20.00% | 2.592 | 2.592 | 1.560896 | 1.66058 | |
4 | 2.592 | 20.00% | 3.1104 | 3.1104 | 1.81063936 | 1.71785 | |
5 | 3.1104 | 13.00% | 3.514752 | 3.514752 | 2.100341658 | 1.67342 | |
6 | 3.514752 | 13.00% | 3.97166976 | 3.97166976 | 2.436396323 | 1.63 | |
7 | 3.97166976 | 13.00% | 4.487986829 | 4.487986829 | 2.826219735 | 1.58798 | |
8 | 4.487986829 | 13.00% | 5.071425117 | 60.294 | 65.36542512 | 3.278414892 | 19.93812 |
Long term growth rate (given)= | 7.00% | Value of Stock = | Sum of discounted value = | 31.37 | |||
Where | |||||||
Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||||||
Total value = Dividend + horizon value (only for last year) | |||||||
Horizon value = Dividend Current year 8 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||
Discount factor=(1+ Required rate)^corresponding period | |||||||
Discounted value=total value/discount factor |