Question

Lightbulb Corp. (LC) plans to pay a dividend of $0.50 in one year, after that, analysts predict a 4% growth rate in earnings per year for 19 years. This will account for 20 years of dividends, and the expected price in 20 years is $15. Comparable investments have a rate of return of 4%. If LC expects to keep its dividend payout ratio constant, which is closest to the price you should expect to pay for the stock today?

Answer 1

Dividend in Year =0.50
growth =4%
Price in year 20 =15
Price you would pay for the stock today =D1/(1+r)+D1*(1+g)/(1+r)^2+D1*(1+g)^2/(1+r)^3.....+D1*(1+g)^18/(1+r)^19+Price Year 20/(1+r)^20
=0.50/(1+4%)+0.50*(1+4%)/(1+4%)^2.........+0.50*(1+4%)^18/(1+4%)^19+15/(1+4%)^20
=0.50*19/(1+4%)+15/(1+4%)^20 =15.98