Question

a) In 2012 Kabir Inc paid $1.25 as dividend. In the most recent dividend in 2019 the dividend was  $1.80. The number of years between these two dividends (n) is 7 years. If the required return of 12.21%. What is the current stock price if we anticipate dividends stopping in 10 years (because the company will go bankrupt)? B) if the company pays the dividends forever (does not go bankrupt) what is the current stock price?

Answer 1

Solution :-

Dividend in Year 2012 = $1.25

Dividend in Year 2019 = $1.80

Therefore Growth Rate = [ D 2019 / D 2012 ]^1/n - 1

= [ $1.80 / $1.25 ]^1/7 - 1

= 1.44 ^1/7 - 1

= 1.05347 - 1

= 0.05347

growth rate = 5.347% Per anumm

Now Recent Dividend D0 = $1.80

Therefore D1 = D0 * ( 1 + g )

= $1.80 * ( 1 + 0.05347 )

= $1.896

Now the Current stock price if dividend stop in 10 years

Year	Dividend	PVF @ 12.21%	Present Value
2020	$1.896	0.891	$1.690
2021	$1.997	0.794	$1.586
2022	$2.104	0.708	$1.489
2023	$2.217	0.631	$1.398
2024	$2.335	0.562	$1.313
2025	$2.460	0.501	$1.232
2026	$2.592	0.446	$1.157
2027	$2.730	0.398	$1.086
2028	$2.876	0.355	$1.020
2029	$3.030	0.316	$0.957
	Value of Share    =		$12.929

Now if the company pays dividend Forever the share price =

Share Price = D1 / ( Ke - g )

= $1.896 / ( 0.1221 - 0.05347 )

= $1.896 / 0.0686

= $27.63

If there is any doubt please ask in comments

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