A company is expected to pay a dividend of $20 per share in one year (t=1),...

A company is expected to pay a dividend of $20 per share in one year (t=1), then $25 for 8 years after that (payments at t=2 ,3,...9), and on the 10th year (t=10) the dividend will be 2% less than at t=9, and will continue to shrink every year after that forever. The required return of the stock is 8%. All rates are effective annual rates.
a) What is the price per share of the company's stock now?
b) The terminal value calculated at the end of year 9 (ie. at t=9) is:

Solutions

Expert Solution

This is an example of Gordon Growth model where g is -ve 2%

Required rate of return

Year	1	2	3	4	5	6	7	8	9	10
Dividend flows-	20	25	25	25	25	25	25	25	25	24.5
PV of dividend	18.52	21.43	19.85	18.38	17.01	15.75	14.59	13.51	12.51
Terminal value at the end of 9th year									245.00	=25*(1-2%)/(8%--2%)
PV of terminal value dividend									122.56	=245/(1+8%)^9

PV of all dividend payments	274.10	=PV of dividends in years 1-9 + PV of terminal value dividend
Price of share	274.10

jeff jeffy answered 1 year ago

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