Question

A firm has just paid its most recent annual dividend of $10 per share, and commits to increase the dividend growing at a rate of 4.5% for the next five years. Afterwards, the dividend will growth at a rate of 3%. Applicable discount rate is 10%. What is the value of a share of this firm’s stock?

A) $226.27

B) $153.50

C) $156.84

D) $150.01

E) $154.94

Answer 1

	A firm has just paid its most recent annual dividend of $10 per share,
	and commits to increase the dividend growing at a rate of 4.5% for the next five years.
	Afterwards, the dividend will growth at a rate of 3%. Applicable discount rate is 10%.
	What is the value of a share of this firm’s stock?
	A) $226.27
	B) $153.50
	C) $156.84
	D) $150.01
	E) $154.94
		Dividends		FVD	PVF at 10%	PVD
Ans.	D0	$10
	D1	$10* 1.045^1		10.45	0.9090909	9.5
	D2	$10* 1.045^2		10.92025	0.8264463	9.025
	D3	$10* 1.045^3		11.41166	0.7513148	8.57375
	D4	$10* 1.045^4		11.92519	0.6830135	8.145062
	D5	$10* 1.045^5		12.46182	0.6209213	7.737809
	Terminal value at Y5	D6/(ke-g)	Ke= 10% g=3%	183.3668	0.6209213	113.8563
	D6	$10* 1.045^5*1.03^1	12.83567
				Value of share	156.838