Question

Assume Highline Company has just paid an annual dividend of $ 0.92. Analysts are predicting an 10.3 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 5.3 % per year. If​ Highline's equity cost of capital is 9.1 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

Answer 1

HI

Below is the formula and values using excel to find out price using dividend discount model

	Current Dividend D0	$0.92
	growth rate for first five years	10.30%
	so year 1 dividend	$1.01
	PV of year 1 dividend	$0.93
	Year 2 dividend	$1.12
	PV of year 2 dividend	$0.94
	Year 3 dividend	$1.23
	PV of year 3 dividend	$0.95
	Year 4 dividend	$1.36
	PV of year 4 dividend	$0.96
	Year 5 dividend	$1.50
	PV of year 5 dividend	$0.97
	Cost of capital	9.10%
	Perpetual dividend growth rate	5.30%
	Price to be sold using dividend discount model	$31.68

Hence stock price using dividend discount model is $31.68

Thanks