ABC paid a dividend of $3.00 this past year. The dividends are expected to grow at...

ABC paid a dividend of $3.00 this past year. The dividends are expected to grow at a rate of 20% for the next three years, and at a constant 3% rate thereafter. The required rate of return for investors in this stock is 10%. Calculate the value of this stock today.

Expert Solution

Value of stock today is $ 68.05

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=1.10^-a	d=b*c
1	$ 3.60	0.9091	$ 3.27
2	$ 4.32	0.8264	$ 3.57
3	$ 5.18	0.7513	$ 3.89

Total			$ 10.74

Working;

Dividend of Year :

1	=	$ 3.00	*	1.20	=	$ 3.60
2	=	$ 3.60	*	1.20	=	$ 4.32
3	=	$ 4.32	*	1.20	=	$ 5.18

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

Terminal value	=	D3(1+g)/(Ke-g)DF3		Where,
	=	$ 57.31		D3(Dividend of year 3)	=	$ 5.18
				g (Growth rate in dividend)	=	3%
				Ke (Required return)	=	10%
				DF3 (Discount factor of year 3)	=	0.7513


Step-3:Sum of present value of future dividends

Sum of present value of future dividends	=	$ 10.74	+	$ 57.31
	=	$ 68.05

So, Price of stock is		$ 68.05

jeff jeffy answered 4 days ago

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