Question

neno Industries just paid a dividend of $1.30. Analysts expect the company's dividend to grow by 15 percent for 3 years and then the rate of growth changes to 5 percent per year from Year 4 onwards. The required rate of return is 8 percent. What is the total present value of the dividends for the first 3 years i.e. for stage I?

neno Industries just paid a dividend of $1.30. Analysts expect the company's dividend to grow by 15 percent for 3 years and then the rate of growth changes to 5 percent per year from Year 4 onwards. The required rate of return is 8 percent. What is the present value of cash flows during the stage II?

neno Industries just paid a dividend of $1.30. Analysts expect the company's dividend to grow by 15 percent for 3 years and then the rate of growth changes to 5 percent per year from Year 4 onwards. The required rate of return is 8 percent. What is the price of this stock?

Answer 1

Stage 1:

The growth rate of dividends = 15%

The required rate of return = 8%

Current dividend(D0) = $1.3

Dividend in year 1(D1) = D0 * ( 1 + growth rate) = 1.3 * 1.15 = 1.495

Dividend in year 2(D2) = D1 * ( 1 + growth rate) = 1.495 * 1.15 = 1.72

Dividend in year 3(D3) = D2 * ( 1 + growth rate) = 1.72 * 1.15 = 1.97

Present value of dividends =

= 1.495/(1.08)^1 +1.72/(1.08)^2 + 1.97/(1.08)^3

= 1.38 + 1.47 + 1.56 = $4.42

Stage 2:

The growth rate of dividends(g) = 5%

The required rate of return(r) = 8%

Dividend in yr 3(D3) = $1.97

The present value of cashflow = = 1.97(1.05)/(0.08 - 0.05)(1.08)^3 = 2.06 / .0377 = $54.64

Stock price =

=  1.495/(1.08)^1 +1.72/(1.08)^2 + 1.97/(1.08)^3 +  1.97(1.05)/(0.08 - 0.05)(1.08)^3

=  1.38 + 1.47 + 1.56 + 54.64

= $59

Hence, the current stock price is $59