Question

Question 1

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 2

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 3

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

All these question need to apply constant growth dividend discount model, according to which current value of share is present value of all dividends expected in future. Mathematically,

where V0 is value of share today, D1 is dividend expected next year, r is the required rate of return and g is growth rate.

Question 1

Dividend received in year 10 is $120. It will then grow constantly at 4% foreover.

So applying the dividend growth model:

V9 = 120/(15% - 4%) = $1,090.91

Now, this is value of share at year 9, we need to discount this to find value today, at t=0. We will use basic time value of money function for this, according to which: FV = PV * (1 + r)ⁿ

1090.91 = PV * (1 + 15%)⁹

PV (or value of share today) = 1090.91/3.5179 = $310.10

Question 2

D1 = $10

We need to apply basic time value of money function to calculate the value of dividend in year 100.

D100 = D1 * (1 + g)⁹⁹

D100 = 10 * (1 + 5%)⁹⁹

D100 = 10 * 125.2393

D100 = $1,252.39

Question 3

Applying constant growth dividend discount model,

V0 = $200