Question

1. Forever 21 is expected to pay an annual dividend of $3.28 per share in one year, which is then expected to grow by 4% per year. The required rate of return
is 14%.
a. What is the current stock price?
b. What is the current stock price if the annual dividend of $3.28 has just been paid? (i.e. paid yesterday or earlier today)
c. What is the current stock price if the annual dividend of $3.28 his about to be paid? (i.e. paid tomorrow or later today)

Answer 1

Sol :

Expected annual dividend = $3.28 per share

Dividend growth rate = 4% per year

Required rate of return = 14%

a) To determine current stock price as follows,

Current Stock Price = Annual Dividend / (Required rate of return - Dividend Growth rate)

Current Stock Price = $3.28 / (14% - 4%)

Current Stock Price = $3.28 / 10%

Current Stock Price = $32.80

b) To determine Current Stock Price if the annual dividend of $3.28 has just been paid as follows,

Current Stock Price = Annual Dividend x (1+Dividend Growth rate) / (Required rate of return - Dividend Growth rate)

Current Stock Price = $3.28 x (1+4%) / (14% - 4%)

Current Stock Price = $3.4112 / 10%

Current Stock Price = $34.12

c) To determine Current Stock Price if the annual dividend of $3.28 has about to be paid as follows,

Current Stock Price = Annual Dividend / (Required rate of return - Dividend Growth rate)

Current Stock Price= $3.28 / (14% - 4%)

Current Stock Price = $3.28 / 10%

Current Stock Price = $32.80