Question

BBB company just paid their annual dividend of $1.20 per share. They are projecting dividends of $1.50 and $1.80 over the next two years, respectively. After that, the dividend will increase by 3% every year. What is the amount you are willing to pay for one share of this stock if your required return is 10 percent?

Answer 1

	CALCUALTION OF D1,D2 & D3
						Dividend of the year
	D0=					$                   1.20
	Dividend after the Year 1= D1				$                   1.50
	Dividend after the Year 2 = D2			$                   1.80
	Dividend after the Year 3 = D3 ($1.80 X 1.03)		$                   1.85
	CALCULATION OF THE VALUE OF THE STOCK AT THE END OF Third YEAR
	Formula	P2 = D3 / Ke - g
	Ke = Cost of Equity = Expected return = 10 %          or =	0.10
	g = Growth rate = 3.0% =                                                      or =	0.03
	P2 = price of the stock at the end of 2nd year
	P2        =	D3	( "/" By	Ke	(-)	Growth	)
	P2        =	$               1.85	("/" By	0.1000	(-)	0.03	)
	P2        =	$               1.85	"/" By	0.0700
	P2        =	$             26.49
	CALCLATION OF PRESENT VALUE OF THE STOCK
		Year	Dividend	PVF @ 10%	Present Value
		1	$             1.50	0.90909	$       1.36
		2	$             1.80	0.82645	$       1.49
		3	$             1.85	0.75131	$       1.39
	Stock Value P3	3	$           26.49	0.75131	$     19.90
		Present Value of Stock =		$     24.14
	Answer = We are willing to pay for one stock maximum upto our present value
		Answer = $ 24.14