Question

AVZ is a​ start-up company who is using all its cash to growth so it does not plan to pay dividends for the next 5 years. The company then plans to start paying annual cash dividends starting in year 6 of ​$4.00 for 14years. ​Thereafter, the company will assume a constant growth dividend policy and the estimated growth rate in dividends forever after that point is 4​%. The price of the stock is set to yield a return of 10​%. What is the price of this stock​ today?

The price today is ​$  

MMM Inc. has an annual cash dividend policy that raises the dividend each year by 10.00%. Last​ year's dividend was ​$1.70 per share. Investors want a 17​% return on this stock. What is the price today of this stock if the company will be in business for five years and not have a liquidating dividend​ (there is no selling price​ - stock simply cease to exist with no value​ then)?

The price of this stock today is?

G-2 Inc. expects the following dividend pattern over the next seven​ years:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
​$1.50	​$1.56	​$1.62	​$1.68	​$1.75	​$1.82	​$1.90

The company will then have a constant dividend of ​$1.97 forever. What is the price of this stock today​ (year 0) if an investor wants to earn 14% rate of​ return?

Answer 1

a. The price of the stock is computed as shown below:

= $ 0 / 1.10¹ + $ 0 / 1.10² + $ 0 / 1.10³ + $ 0 / 1.10⁴ + $ 0 / 1.10⁵ + $ 4 / 1.10⁶ + $ 4 / 1.10⁷ + $ 4 / 1.10⁸ + $ 4 / 1.10⁹ + $ 4 / 1.10¹⁰ + $ 4 / 1.10¹¹ + $ 4 / 1.10¹² + $ 4 / 1.10¹³ + $ 4 / 1.10¹⁴ + $ 4 / 1.10¹⁵ + $ 4 / 1.10¹⁶ + $ 4 / 1.10¹⁷ + $ 4 / 1.10¹⁸ + $ 4 / 1.10¹⁹ + 1 / 1.10¹⁹ [ ( $ 4 ( 1+0.04) / ( 0.10 - 0.04 ) ]

= $ 29.63 Approximately

b. D1 = $ 1.70 x 1.10

= $ 1.87

D2 = $ 1.70 x 1.10²

= $ 2.057

D3 = $ 1.70 x 1.10³

= $ 2.2627

D4 = $ 1.70 x 1.10⁴

= $ 2.48897

D5 = $ 1.70 x 1.10⁵

= $ 2.737867

The price will be as shown below:

= $ 1.87 / 1.17¹ + $ 2.057 / 1.17² + $ 2.2627 / 1.17³ + $ 2.48897 / 1.17⁴ + $ 2.737867 / 1.17⁵

= $ 7.09 Approximately

c. The price of the stock is computed as shown below:

= $ 1.50 / 1.14¹ + $ 1.56 / 1.14² + $ 1.62 / 1.14³ + $ 1.68 / 1.14⁴ + $ 1.75 / 1.14⁵ + $ 1.82 / 1.14⁶ + $ 1.90 / 1.14⁷ + 1 / 1.14⁷ ($ 1.97 / 0.14 )

= $ 12.73 Approximately

Feel free to ask in case of any query relating to this question