Question

In: Finance

Answer the following in Excel. Show your work UL Company (“ULC”) paid a common stock dividend...

Answer the following in Excel. Show your work

UL Company (“ULC”) paid a common stock dividend of $2.50 per share just now. ULC plans to reduce its common stock dividend to $2.00 next year, then pay dividends of $3.00 the following three years, and finally settle on a dividend growth rate of 5% for the rest of the company’s life. If investors in companies of similar risk require a 9.75% rate of return, what is the value of LC common stock today?

Expert Solution

Price of STock = PV of Cfs from it.

D5 = D4 ( 1 + g)

D5 - Div after 5 Years

D4 - Div after 4 Years

g - Growth Rate

D5 = D4 ( 1 + g)

= $ 3.00 ( 1 + 0.05)

= $ 3.00 * 1.05

= $ 3.15

P4 = D5 / [ Ke - g ]

P4 - Price after 4 Years

D5 - Div after 5 Years

Ke - Required Ret

g - Growth Rate

P4 = D5 / [ Ke - g ]

= $ 3.15 / [ 9.75% - 5% ]

= $ 3.15 / 4.75%

= $ 66.32

Price Today:

Year	Particulars	Cash Flow	PVF @9.75%	PV of CFs
1	D1	$ 2.00	0.9112	$ 1.82
2	D2	$ 3.00	0.8302	$ 2.49
3	D3	$ 3.00	0.7565	$ 2.27
4	D4	$ 3.00	0.6893	$ 2.07
4	P4	$ 66.32	0.6893	$ 45.71
Price Today				$ 54.36

Price of stock today is $ 54.36

jeff jeffy answered 2 years ago

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