Cardinal Corp. has just paid out a per share dividend of $5.05 on its common stock...

Cardinal Corp. has just paid out a per share dividend of $5.05 on its common stock for the year ended. Analysts expext this didvidend to grow at a rapid rate of 12% for the coming four years. the growth in per share dividends will decrease to a constant rate of 4% for the foreseeable future after that. Investors in Cardinal common stock require a return of 10%. Based on the following info we would expect the current price of each share of common stock to be:

$88.74

$92.40

$98.13

$103.80

$115.21

Expert Solution

	Required rate=	10.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	5.05	12.00%	5.656		5.656	1.1	5.1418
2	5.656	12.00%	6.33472		6.33472	1.21	5.23531
3	6.33472	12.00%	7.0948864		7.0948864	1.331	5.33049
4	7.0948864	12.00%	7.946272768	137.735	145.6812728	1.4641	99.50227
	Long term growth rate (given)=	4.00%			*Value of Stock =*	*Sum of discounted value =*	115.21

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year

Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

jeff jeffy answered 6 months ago

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