Question

Assume Highline Company has just paid an annual dividend of $ 0.91 Analysts are predicting an 11.7 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 5.1 % per year. If​ Highline's equity cost of capital is 7.9 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

Answer 1

Price of stock is $ 45.66

As per dividend discount method, current share price is the present value of future dividends.
Step-1:Present value of dividend of next 5 years
Year	Dividend	Discount factor	Present value
a	b	c=1.079^-a	d=b*c
1	$       1.02	0.9268	$       0.94
2	$       1.14	0.8589	$       0.98
3	$       1.27	0.7960	$       1.01
4	$       1.42	0.7378	$       1.05
5	$       1.58	0.6837	$       1.08
Total			$       5.05
Step-2:Calculation of present value of terminal value of dividend at the end of 5 years
Terminal value	=	(D5*(1+g)/(Ke-g))*DF5		Where,
	=	$    40.61		D5(Dividend of year 5)	=	$       1.58
				g (Growth rate)	=	5.10%
				Ke (Required return)	=	7.9%
				DF5 (Discount factor of year 5)	=	0.6837
Step-3:Sum of present value of future dividends
Sum of present value of future dividends	=	$       5.05	+	$    40.61
	=	$    45.66
So, Price of stock is		$    45.66