Question

ABCDEF Corp. currently pays $3.80 in dividend as of this year. ABCDEF’s dividends will grow by 4.1% each year for next 15 years, and then grow by 3.8% each year afterward. What’ the present value of the firm’ tock given this information assuming that the required rate of return for the firm’ industry is 10.1%?

Answer 1

Present value of firm's stock $ 64.50

As per dividend discount method, current share price is the present value of future dividends.
Step-1:Present value of dividend of next three years
Year	Dividend	Discount factor	Present value
a	b	c=1.101^-a	d=b*c
1	$       3.96	0.9083	$       3.59
2	$       4.12	0.8249	$       3.40
3	$       4.29	0.7493	$       3.21
4	$       4.46	0.6805	$       3.04
5	$       4.65	0.6181	$       2.87
6	$       4.84	0.5614	$       2.71
7	$       5.03	0.5099	$       2.57
8	$       5.24	0.4631	$       2.43
9	$       5.46	0.4206	$       2.29
10	$       5.68	0.3821	$       2.17
11	$       5.91	0.3470	$       2.05
12	$       6.15	0.3152	$       1.94
13	$       6.41	0.2863	$       1.83
14	$       6.67	0.2600	$       1.73
15	$       6.94	0.2362	$       1.64
Total			$    37.48
Working:
Dividend of Year:
1	=	$       3.80	*	1.041	=	$       3.96
2	=	$       3.96	*	1.041	=	$       4.12
Similarly dividend for 15 years is calculated as above.
Step-2:Calculation of terminal value of dividend at the end of three years
Terminal value	=	D3*(1+g)/(Ke-g)*DF3		Where,
	=	$    27.01		D15(Dividend of year 15)	=	$       6.94
				g (Growth rate in dividend)	=	3.8%
				Ke (Required return)	=	10.1%
				DF15 (Discount factor of year 15)	=	0.2362
Step-3:Sum of present value of future dividends
Sum of present value of future dividends	=	$    37.48	+	$    27.01
	=	$    64.50
So, Price of stock is		$    64.50