Question

Coca-Cola Co.'s dividend growth has been about 9% per year. The industry median dividend growth is 7% per year. Assume that Coca-Cola's dividend growth will continue at 9% for 5 years and then decrease to the industry average. The current dividend is $1.60. The discount rate is 11%.

A. Calculate the dividend of next year.

B. Calculate the dividend in 6 years.

C. Calculate the current value of the dividends for the first 5 years.

D. Calculate the current value of the dividends thereafter.

E. State the stock price of Coca-Cola Co. at the end of trading on 11/5/19. Based on your analysis, indicate if you would buy or sell this stock and why.

Answer 1

Coco Cola's dividend growth rate (g) = 9% p.a.
Industry dividend grwoth rate (gi) = 7% p.a.
Time period for 9% growth = 5 years
Current Dividend (D) = $1.60
Discount rate (r) = 11%
A. Dividend for next year
Dividend for next year = D x (1 + g)
Dividend for next year = $ 1.60 x (1 + 0.09)
Dividend for next year = $ 1.744
B. Dividend for next 6 year
Year	Dividend in Previous Year	Growth Rate	Dividend for the year*
1	$1.60	9%	$1.74
2	$1.74	9%	$1.90
3	$1.90	9%	$2.07
4	$2.07	9%	$2.26
5	$2.26	9%	$2.46
6	$2.46	7%	$2.63
*Dividend for the year = Dividend in Previous Year x (1 + Growth rate)
C. Current Value of dividend for first 5 years
Year	Dividend for the year	PVF @ 11%	Present Value of Dividend
1	$1.74	0.901	$1.57
2	$1.90	0.812	$1.54
3	$2.07	0.731	$1.51
4	$2.26	0.659	$1.49
5	$2.46	0.593	$1.46
D. Current Value of dividend for 6 years
Present value of dividend = $2.63 x 0.535
Present Value of dividend = $ 1.41