Question

Calculate the following stock valuation problems using Microsoft Excel:

Company X is paying an annual dividend of $1.35 and has decided to pay the same amount forever. How much should you pay for the stock, if you want to earn an annual rate of return of 9.5% on this investment?

You want to purchase common stock of Company X and hold it for 7 years. The company just announced they will be paying an annual cash dividend of $6.00 per share for the next 9 years. How much should you pay for the stock, if you will be able to sell the stock for $28 at the end of seven years and you want to earn an annual rate of return of 11% on this investment?

Answer 1

1)	D0	1.35
	The stock is paying a constant dividend of 1.35 in perpetuity
	D1	1.35
	According to the dividend growth model,
	when the stock pays a constant dividend the price of the stock P0 is given by
	P0 = D1/(R)
	where R is the discount rate that is .095.
	P0 = 1.35/(.095)
	P0 = 14.21
	You should pay $14.21 for the stock.
2)	The stock pays will pay a dividend of $6 for the next 9 years.
	D1	6
	D2	6
	D3	6
	D4	6
	D5	6
	D6	6
	D7	6
	P7	28
	Cash flow at the end of year 7	P7+D7
	Cash flow at the end of year 7	34
	The price of the stock today = sum of present value of future cash flows.
	Using R = .11
	Year	1	2	3	4	5	6	7
	Cash flow	6	6	6	6	6	6	34
	Present value	5.41	4.87	4.39	3.95	3.56	3.21	16.38
	sum of present values	41.76
	You should pay $41.76 for the stock today.