Assume a stock currently pays no dividends today, but expected to begin paying dividends $6 per...

Assume a stock currently pays no dividends today, but expected to begin paying dividends $6 per share in 4 years. The dividends are expected to have a constant growth rate of 6% at that time and firm has a cost of equity of 11.4%. Using the dividend discount model, what do you estimate the share price should be?

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Expert Solution

Value after year 4=(D4*Growth rate)/(Cost of equity-Growth rate)

=(6*1.06)/(0.114-0.06)

=117.778

Hence share price=Future dividend and value*Present value of discounting factor(rate%,time period)

=6/1.114^4+117.778/1.114^4

=$80.37(Approx)

jeff jeffy answered 2 years ago

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