You expect that Walmart will pay dividends 1.5 in one year, 2.8 in two years and...

You expect that Walmart will pay dividends 1.5 in one year, 2.8 in two years and 4.9 in three years. After that dividends will grow at 3.4% per year and investors required rate of return is 7.3%. According to the dividend discount model what should be the price of Walmarts stocks?

Expert Solution

The stock begins constant growth in Year 3, so we can find the price of the stock in Year 3 as:

P3 = D3(1 + g) / (R − g)

P3 = $4.9(1.034) / (0.073 − 0.034)

P3 = $129.9128

The price of the stock today is the PV of the first three dividends, plus the PV of the Year 3 stock price. So, the price of the stock today will be:

P0 = $1.5 / 1.073 + $2.8 / 1.073^2 + $4.9 / 1.073^3 + $129.9128 / 1.073^3

P0 = $112.96

jeff jeffy answered 2 years ago

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