Question

Red Sun Rising just paid a dividend of $2.64 per share. The company said that it will increase the dividend by 30 percent and 25 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.4 percent. If the required return is 12.2 percent, what is the stock price today?

Answer 1

Step-1:Present value of 2 years dividend

Year

Dividend

Discount factor

Present Value

a

b

c=1.122^-a

b*c

1

$       3.43

0.8913

$       3.06

2

$       4.29

0.7944

$       3.41

Present Value

$       6.47

Working:

Dividend in Year 1

=

$       2.64

x

1.30

=

$       3.43

Dividend in Year 2

=

$       3.43

x

1.25

=

$       4.29

Step-2:Present Value of 2 year onwards dividend

Present Value

=

(D2*(1+g)/(Ke-g))*df2

Where,

=

(4.29*(1+0.034)/(0.122-0.034))*0.7944

D2

Yaer 2 dividend

$       4.29

=

$    40.04

g

growth rate

3.40%

Ke

Required return

12.20%

df2

discount factor for year 2

0.7944

Step-3:Present value of all dividend

Present Value of all dividend

=

$       6.47

+

$    40.04

=

$    46.51

Thus,

Stock price today is $ 46.51