Question

Assume Highline Company has just paid an annual dividend of $ 1.01. Analysts are predicting an 10.1 % 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 8.6 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

Answer 1

Ans.

Year	Dividends(a)	Discounting factor @ 8.6% (b)	Present Value (a*b)
1	$               1.11	0.92081031	$            1.02
2	$               1.22	0.84789163	$            1.04
3	$               1.35	0.78074736	$            1.05
4	$               1.48	0.71892022	$            1.07
5	$               1.63	0.66198915	$            1.08
			$            5.26

Formulas

A/1	B	C	D	E
2	Year	Dividends(a)	Discounting factor @ 8.6% (b)	Present Value (a*b)
3	1	=1.01*1.101	=1/1.086	=+C3*D3
4	2	=+C3*1.101	=+D3/1.086	=+C4*D4
5	3	=+C4*1.101	=+D4/1.086	=+C5*D5
6	4	=+C5*1.101	=+D5/1.086	=+C6*D6
7	5	=+C6*1.101	=+D6/1.086	=+C7*D7
8				=SUM(E3:E7)

P5 = D6 / Re - g

P5 = $ 1.63 * ( 1.053) / 8.6% - 5.3%

P5 = $ 1.72062544 / 3.3% = $ 52.14016485

Present Value = $ 52.14016485 / (1.086)^5

Present Value = $ 34.5162236 or $ 34.52

Price = $ 5.26 + $ 34.52 = $ 39.78