Question

In: Finance

A common stock has just paid a dividend of $2.18/share. The dividend is expected to grow by 5.62% per year for 18 years.


A common stock has just paid a dividend of $2.18/share. The dividend is expected to grow by 5.62% per year for 18 years. After that the dividends will stay constant in perpetuity. The required rate of return on the stock is 16%. What should the price of the stock be today?

Solutions

Expert Solution

Computation of Price of the Stock

Answer : As per dividend discount model price of the share is present value of all future cash flow

Step 1 : Explicit Forecast period

Year

Dividend

PVIF @16%

Present Value

1

$2.30

0.862068966

$1.98

2

$2.43

0.743162901

$1.81

3

$2.57

0.640657674

$1.65

4

$2.71

0.552291098

$1.50

5

$2.87

0.476113015

$1.36

6

$3.03

0.410442255

$1.24

7

$3.20

0.35382953

$1.13

8

$3.38

0.305025457

$1.03

9

$3.57

0.26295298

$0.94

10

$3.77

0.226683603

$0.85

11

$3.98

0.1954169

$0.78

12

$4.20

0.168462844

$0.71

13

$4.44

0.14522659

$0.64

14

$4.69

0.125195336

$0.59

15

$4.95

0.107927014

$0.53

16

$5.23

0.093040529

$0.49

17

$5.52

0.080207353

$0.44

18

$5.83

0.06914427

$0.40

Total

$18.08

Step 2 : Horizon Value

Price at the end of Year 18 = D­19 / Re

                                         = 5.83 / 0.16

                                         = $ 36.44 approx

Price of the Stock Today = $ 36.44 * 0.06914427

                                        = $ 2.52 (approx)

       

Price of the Stock = Step 1 + Step 2

                          = $18.08 + $ 2.52

                         = $ 20.6 (approx.)

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

A common stock has just payed a dividend of $2.32/share. The dividend is expected to grow...
A common stock has just payed a dividend of $2.32/share. The dividend is expected to grow by 16% for the coming 28 years. After that, the growth rate in dividend is expected to be 4.28% per year in perpetuity. The RRR on the stock is 12.82%. What is the value of the stock today?
ABC stock just paid dividend $0.55 per share, and future dividends are expected to grow at...
ABC stock just paid dividend $0.55 per share, and future dividends are expected to grow at a constant rate of 1.69% every year. The required return for the ABC stock is 20.99%. What is the expected annual dividend amount (per share) ABC stockholders expect to receive next year?
ABZ Corp. just paid a dividend of $1.00 per share. The dividend is expected to grow...
ABZ Corp. just paid a dividend of $1.00 per share. The dividend is expected to grow 6% per year in perpetuity.  The stock's beta is 0.85.  The risk-free rate is 3%, and the market risk premium is 7%. The current stock price is $37 per share.  Assume that one year from now the stock will be correctly valued. What are the dividend yield, capital gain yield and expected return for the coming year? Draw the Security Market Line and plot the stock on...
MMM Co. just paid a dividend of $1.10 per share. The dividend is expected to grow...
MMM Co. just paid a dividend of $1.10 per share. The dividend is expected to grow by 30% next year, 90% in both Years 2 & 3, 20% in Year 4, and then grow at a constant rate of 4% thereafter. The required rate of return is 5%. Compute the selling price of the stock.
a. A stock just paid a dividend of $1.04. The dividend is expected to grow at...
a. A stock just paid a dividend of $1.04. The dividend is expected to grow at 26.98% for three years and then grow at 4.97% thereafter. The required return on the stock is 11.63%. What is the value of the stock? b. A stock just paid a dividend of $1.17. The dividend is expected to grow at 22.53% for five years and then grow at 4.80% thereafter. The required return on the stock is 14.27%. What is the value of...
A stock just paid a dividend of $2.40. The dividend is expected to grow at a...
A stock just paid a dividend of $2.40. The dividend is expected to grow at a rate of 5% forever. If the stock is currently selling for $25.00, what return do investors require to hold this stock? 18%, 17%, 16%, 15% A project is projected to cost $2,000,000 to undertake. It will generate positive cash inflows as follows: Year 1 - $400,000; Year 2 – 500,000; Year 3 - $650,000; Year 4 – 700,000; Year 5 – 800,000. What is...
1. Membo just paid a dividend of $2.2 per share. Dividends are expected to grow at...
1. Membo just paid a dividend of $2.2 per share. Dividends are expected to grow at 7%, 6%, and 4% for the next three years respectively. After that the dividends are expected to grow at a constant rate of 3% indefinitely. Stockholders require a return of 8 percent to invest in Membo’s common stock. Compute the value of Membo’s common stock today.
Hank’s Barbecue just paid a dividend of $2.05 per share. The dividends are expected to grow...
Hank’s Barbecue just paid a dividend of $2.05 per share. The dividends are expected to grow at a 14.5 percent rate for the next five years and then level off to a 9.5 percent growth rate indefinitely. If the required return is 12.5 percent, what is the value of the stock today? What if the required return is 17.5 percent?
Membo just paid a dividend of $2.2 per share. Dividends are expected to grow at 7%,...
Membo just paid a dividend of $2.2 per share. Dividends are expected to grow at 7%, 6%, and 4% for the next three years respectively. After that the dividends are expected to grow at a constant rate of 3% indefinitely. Stockholders require a return of 8 percent to invest in Membo’s common stock. Compute the value of Membo’s common stock today.
Hank’s Barbecue just paid a dividend of $2.05 per share. The dividends are expected to grow...
Hank’s Barbecue just paid a dividend of $2.05 per share. The dividends are expected to grow at a 14.5 percent rate for the next five years and then level off to a 9.5 percent growth rate indefinitely. If the required return is 12.5 percent, what is the value of the stock today? What if the required return is 17.5 percent?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT