In: Finance
.Suppose Footlocker’s Inc. Will pay dividends of $ 5, $7, $12, $9 for first four years respectively. Then it grows at the rate of 11 percent for next three years. Then it grows at the rate of 6 percent for next three years. What value you will place on this stock if investor requires nine percent return over the period?
Required rate= | 9.00% | ||||||
Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 0 | 0.00% | 5 | 5 | 1.09 | 4.5872 | |
2 | 5 | 0.00% | 7 | 7 | 1.1881 | 5.89176 | |
3 | 7 | 0.00% | 12 | 12 | 1.295029 | 9.2662 | |
4 | 12 | 0.00% | 9 | 9 | 1.41158161 | 6.37583 | |
5 | 9 | 11.00% | 9.99 | 9.99 | 1.538623955 | 6.49281 | |
6 | 9.99 | 11.00% | 11.0889 | 11.0889 | 1.677100111 | 6.61 | |
7 | 11.0889 | 11.00% | 12.308679 | 434.907 | 447.215679 | 1.828039121 | 244.64229 |
Long term growth rate (given)= | 6.00% | Value of Stock = | Sum of discounted value = | 283.87 | |||
Where | |||||||
Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||||||
Unless dividend for the year provided | |||||||
Total value = Dividend + horizon value (only for last year) | |||||||
Horizon value = Dividend Current year 7 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||
Discount factor=(1+ Required rate)^corresponding period | |||||||
Discounted value=total value/discount factor |