The Portheus Corp. currently pays a dividend of $3.00 per share. This dividend is expected to...

The Portheus Corp. currently pays a dividend of $3.00 per share. This dividend is expected to grow at a rate of 14% per year for the next 5 years and at a constant rate of 4% per year thereafter. If Portheus’ stock has a required return of 8% per year, what should the current price of the stock be?

Expert Solution

Current price of stock should be $ 119.90

As per dividend discount method, current share price is the present value of future dividends.

Step-1:Present value of dividend of non-constant growth years

Year	Dividend	Discount factor	Present value
a	b	c=1.08^-a	d=b*c
1	$ 3.42	0.9259	$ 3.17
2	$ 3.90	0.8573	$ 3.34
3	$ 4.44	0.7938	$ 3.53
4	$ 5.07	0.7350	$ 3.72
5	$ 5.78	0.6806	$ 3.93


Total			$ 17.69

Working;

Dividend of Year :

1	=	$ 3.00	*	1.14	=	$ 3.42
2	=	$ 3.42	*	1.14	=	$ 3.90
3	=	$ 3.90	*	1.14	=	$ 4.44
4	=	$ 4.44	*	1.14	=	$ 5.07
5	=	$ 5.07	*	1.14	=	$ 5.78


Step-2:Calculation of terminal value of dividend at the end of non-constant growth years

Terminal value	=	D5(1+g)/(Ke-g)DF5		Where,
	=	$ 102.21		D5(Dividend of year 5)	=	$ 5.78
				g (Growth rate in dividend)	=	4%
				Ke (Required return)	=	8%
				DF18 (Discount factor of year 18)	=	0.6806


Step-3:Sum of present value of future dividends

Sum of present value of future dividends	=	$ 17.69	+	$ 102.21
	=	$ 119.90

So, Price of stock is		$ 119.90

jeff jeffy answered 2 years ago

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