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SuFi Inc. is expected to pay the following dividends over the next four years: $9, $7,...

SuFi Inc. is expected to pay the following dividends over the next four years: $9, $7, $5, and $2.74. Their CFO, Mr. Dane Cook, pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 13 percent, what is the current share price?

Expert Solution

Step-1, Dividend per share for the next four years

Dividend in Year 1 (D1) = $9.00 per share

Dividend in Year 2 (D2) = $7.00 per share

Dividend in Year 3 (D3) = $5.00 per share

Dividend in Year 4 (D4) = $2.74 per share

Step-2, Calculation of Stock Price in Year 4 (P4)

Dividend Growth Rate (g) = 5.00% per year

Required Rate of Return (Ke) = 13.00%

Therefore, the Stock Price in Year 4 (P4) = D4(1 + g) / (Ke – g)

= $2.74(1 + 0.05) / (0.13 – 0.05)

= $2.8770 / 0.08

= $35.96 per share

Step-3, Current Price of the share

The Current price of the share is the present value of future dividend plus the present value of the share price in year 4

Year	Cash flow ($)	Present Value factor at 13.00%	Present Value of cash flows ($)

1	9.00	0.88496	7.96
2	7.00	0.78315	5.48
3	5.00	0.69305	3.47
4	2.74	0.61332	1.68
4	35.96	0.61332	22.06

TOTAL			40.65

“Hence, the current share price would be $40.65”

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.

jeff jeffy answered 8 months ago

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