In: Finance
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. What is the price of the stock today (P0)?
Required rate= | 7.00% | ||||||
Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 2 | 8.00% | 2.16 | 2.16 | 1.07 | 2.0187 | |
2 | 2.16 | 8.00% | 2.3328 | 2.3328 | 1.1449 | 2.03756 | |
3 | 2.3328 | 8.00% | 2.519424 | 2.519424 | 1.225043 | 2.0566 | |
4 | 2.519424 | 8.00% | 2.72097792 | 2.72097792 | 1.31079601 | 2.07582 | |
5 | 2.72097792 | 8.00% | 2.938656154 | 154.279 | 157.2176562 | 1.402551731 | 112.09402 |
Long term growth rate (given)= | 5.00% | Value of Stock = | Sum of discounted value = | 120.28 | |||
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 5 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||
Discount factor=(1+ Required rate)^corresponding period | |||||||
Discounted value=total value/discount factor |