Question

Nerus' Catering is growing at a very fast rate. As a result, the company expects to increase its dividend to $0.42, $0.92, and $1.32 over the next three years, respectively. After that, the dividend is projected to increase by 6.5 percent annually. The last annual dividend the firm paid was $0.24 a share. What is the current value of this stock if the required return is 10.3 percent?

The common stock of Major Carter Naquadah Generators is valued at $8 a share. The company increases its dividend by 3.6 percent annually and has just paid a dividend of $0.73 per share. What is the required rate of return (in percents) on this stock?

Answer 1

Q1)

Current value of stock

$      29.69

Working:

a.

Present Value of next three year's dividend

Year

Dividend

Discount factor

Present Value

a

b

c=1.103^-1

d=b*c

1

$       0.42

0.907

$       0.38

2

$       0.92

0.822

$       0.76

3

$       1.32

0.745

$       0.98

Total

$      2.12

b.

Terminal value of dividend

Terminal value

=

D3*(1+g)/(Ke-g)

Where,

=

1.32*(1+0.065)/(0.103-0.065)

D3

$       1.32

=

$    36.99

g

6.5%

Ke

10.3%

c.

Present Value of terminal value

=

$    36.99

x

0.745

=

$    27.57

d.

Present Value of all future dividend

=

$       2.12

+

$    27.57

=

$    29.69

As per dividend discount model, Current value of this stock is the present value of all dividend from stock during their lifetime.

So, Current value of stock is

$      29.69

Q2)

Required rate of return

13.05%

Working:

As per Capital Asset Pricing model,

Required rate of return

=

(D0*(1+g)/P0)+g

Where,

=

(0.73*(1+0.036)/8)+0.036

D0

$       0.73

=

13.05%

g

3.60%

P0

$             8