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Calculate the value of a stock with the following expectations for dividend payments: $1.75 in Year...

Calculate the value of a stock with the following expectations for dividend payments: $1.75 in Year 1, $2.00 in Year 2, and then annual dividend growth of 1.5% per year indefinitely. Assume a discount rate of 9%. Solve the problem two different ways: first by using the algebraic formula for the Gordon Growth Model combined with PV of uneven dividend payments, then by using Excel to calculate and sum the dividends and their respective present values for the next 150 years. hint: Use the Uneven, then Const. Growth Dividend

Solutions

Expert Solution

Dividend in Year 2 = $2

Now using Gordon growth formulae, stock price at the end of year 2 = Dividend at year 2 * growth rate / (discount rate - growth rate)

Stock price at the end of year 2 = 2*1.015 / (9%-1.5%) = $27.07

Now present value of stock is PV of all future payments

PV = 1.75 / 1.09 + (2+27.07)/1.09^2 = $26.07

Now using Excel,

As we can see using excel, the stock price is $26.0697

Pasting with formulas (Note that Some columns are hidden with similar formulas so that you are able to see the last column)

jeff jeffy answered 1 day ago
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