Question

Assume Highline Company has just paid an annual dividend of $1.06. 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 7.5% per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

Answer 1

D1=(1.06*1.117)=1.18402

D2=(1.18402*1.117)=1.32255034

D3=(1.32255034*1.117)=1.47728873

D4=(1.47728873*1.117)=1.65013151

D5=(1.65013151*1.117)=1.8431969

Value after year 5=(D5*Growth rate)/(Equity cost of capital-Growth rate)

=(1.8431969*1.051)/(0.075-0.051)

=80.7166642

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.18402/1.075+1.32255034/1.075^2+1.47728873/1.075^3+1.65013151/1.075^4+1.8431969/1.075^5+80.7166642/1.075^5

=$62.18(Approx)