Question

Jenner’s common stock is currently selling at $ 30 per share. Dividends of $ 1 are expected to be paid at the end of the year (t = 1). The required rate-of-return on this stock is 12%.

(a) If dividends are expected to grow at a 10% rate indefinitely, find the value of the stock.

(b) If dividends are expected to grow at a 15% rate over the next 3 years, then at 11% for years 4 and 5, and 6% forever beginning in year 6:

(1) Find the dividends for years 1 through 6.

(2) Find the value of the stock at the end of year 5.

(3) Find the value of the stock at the end of year 3.

(4) Find the value of the stock now at t = 0.

(5) Does the current value of the stock change if you plan on selling it at the end of year 5? at the end of year 3? Explain.

Answer 1

a)
Value of Stock = D1 /(k-g)
Value of Stock = $1 /(12%-10%)	$50.00
b) 1.
Year	Growth rate	Expected Dividend = Dn x (1+Growth rate)
1	15.00%	$1.15
2	15.00%	$1.32
3	15.00%	$1.52
4	11.00%	$1.69
5	11.00%	$1.87
6	6.00%	$1.99
2)
Value at end of 5th year = $1.87 x (1+6%)/(12%-6%)	$33.11
3)
Value at end of 3rd year = $1.52 x (1+11%)/(12%-11%)	$168.82
4)
Year	cash flow	PV @ 12%	Present Value
1	$1.15	0.892857143	$1.03
2	$1.32	0.797193878	$1.05
3	$1.52	0.711780248	$1.08
4	$1.69	0.635518078	$1.07
5	$34.98	0.567426856	$19.85
		Value of the stock	$24.08
5)
Year	cash flow	PV @ 12%	Present Value
1	$1.15	0.892857143	$1.03
2	$1.32	0.797193878	$1.05
3	$170.34	0.711780248	$121.24
		Value of Stock at end year 3	$123.32
Yes, the current value of the stock change if sell it at the end of year 5 or at the end of year 3 because value of share is more during extraordinary growth years as compared to normal growth years