Question

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 12% per year for the next 6 years and then decreasing the growth rate to 6% per year forever after. The company just paid its annual dividend in the amount of $1.46 per share. What is the current value of one share if the required rate of return is 8%?  ENTER YOUR ANSWER WITH TWO DECIMAL PLACEs (e.g., 12.25). ROUND TO THE NEAREST CENT. DO NOT USE THE DOLLAR SIGN ($) IN YOUR ANSWER.

**only work out using step by step not excel or any other program!! **

Answer 1

Step-1, Calculation of Dividend per share for the next 6 years

Dividend in Year 0 (D0) = $1.46 per share

Dividend in Year 1 (D1) = $1.6352 per share [$1.46 x 112%]

Dividend in Year 2 (D2) = $1.8314 per share [$1.6352 x 112%]

Dividend in Year 3 (D3) = $2.0512 per share [$1.8314 x 112%]

Dividend in Year 4 (D4) = $2.2973 per share [$2.0512 x 112%]

Dividend in Year 5 (D5) = $2.5730 per share [$2.2973 x 112%]

Dividend in Year 6 (D6) = $2.8818 per share [$2.5730 x 112%]

Step-2, Calculation of Stock Price for the Year 6 (P6)

Stock Price for the Year 6 = D6(1 + g) / (Ke – g)

= $2.8818(1 + 0.06) / (0.08 – 0.06)

= $3.0547 / 0.02

= $152.73 per share

Step-3, Value of the Stock

As per Dividend Discount Model, the Value of the Stock is the aggregate of the Present Value of the future dividend payments and the present value the stock price for the year 6

Year	Cash flow ($)	Present Value factor at 8.00%	Present Value of cash flows ($)
1	1.6352	0.92593	1.51
2	1.8314	0.85734	1.57
3	2.0512	0.79383	1.63
4	2.2973	0.73503	1.69
5	2.5730	0.68058	1.75
6	2.8818	0.63017	1.82
6	152.73	0.63017	96.25
\TOTAL			106.22

“Hence, the current value of one share will be $106.22”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.