Question

Introduction to finance

Answer questions A-D

Question A

Alphabet Inc. will not pay it's first dividend until ten years from now. The first dividend received in 10 years (Year 10) is expected to be $120. Dividends are expected to grow at 4% forever after this first dividend payment. The required rate of return for similar stocks is 15%. What is the current value of Alphabet, Inc. stock?

Question B

Snoke Inc's will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What will Snoke's dividend be in 100 years? (Year 100)?

Question C

Snoke Inc's will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What is Snoke's estimated stock price at the end of Year 99? (Hint use Year 100 dividend)

Question D

Snoke Inc's will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What is Snoke's estimated stock price as of today (Year 0 Estimated Price of Stock)?

Answer 1

Answer A
Value of future dividends at the end of 10th year = Dividend payable in 11th year / [required rate of return - Growth rate]
Value of future dividends at the end of 10th year = [$120 * 1.04] / [0.15 - 0.04]
Value of future dividends at the end of 10th year = $1134.55
Current value of Alphabet, Inc. stock = Value of future dividends at the end of 10th year * present value factor @ 15%
Current value of Alphabet, Inc. stock = $1134.55 * [1/1.15^10] = $280.44
Answer B
Value of Snoke's dividend be in 100 years = Next Year dividend * (1+growth rate)^no.of years
Value of Snoke's dividend be in 100 years = $10 * (1+0.05)^100 = $1315.01
Answer C
Stock price at the end of 1st Year = Dividend in 2nd Year / [required rate of return - Growth rate]
Stock price at the end of 1st Year = [$10 * 1.05] / [0.10 - 0.05] = $210
Snoke's estimated stock price at the end of Year 99 = Stock price at the end of 1st Year * [1+(required rate of return - growth rate)]^no.of years
Snoke's estimated stock price at the end of Year 99 = $210 * [1+(0.10 - 0.05)]^100
Snoke's estimated stock price at the end of Year 99 = $27615.26
Answer D
Snoke's estimated stock price as of today = Present value of next year dividend + Present value of future dividends
Present value of next year dividend = Next dividend * present value factor @ 10%
Present value of next year dividend = $10 * (1/1.10^1) = $9.09
Present value of future dividends at the end of 2nd year = [Next year dividend * (1+growth rate)] / [required rate of return - Growth rate]
Present value of future dividends at the end of 2nd year = [$10 * (1+0.05)] / [0.10 - 0.05] = $210
Present value of future dividend = $210 * (1/1.10^2) = $173.55
Snoke's estimated stock price as of today = $9.09 + $173.55 = $182.64