Question
In: Finance
G-2 Inc. expects the following dividend pattern over the next seven years: Year 1- $1.50 Year...
G-2 Inc. expects the following dividend pattern over the next seven years:
Year 1- $1.50
Year 2 - $1.56
Year 3 - $1.62
Year 4 - $1.68
Year 5- $1.75
Year 6 - $1.82
Year 7 - $1.90
The company will then have a constant dividend of $ 1.97 forever. What is the price of this stock today (year 0) if an investor wants to earn 16% rate of return?
The stock price is $_____ (Round to two decimal places.)
Solutions
Expert Solution
Terminal value of dividends after year 7 at the end of year 7 = Dividend8 / ke = 1.97/0.16 = $12.3125
Price of stock = PV of dividends:
| Year | Cashflow | PVF@16% | PV |
| 1 | 1.50 | 0.862 | 1.29 |
| 2 | 1.56 | 0.743 | 1.16 |
| 3 | 1.62 | 0.641 | 1.04 |
| 4 | 1.68 | 0.552 | 0.93 |
| 5 | 1.75 | 0.476 | 0.83 |
| 6 | 1.85 | 0.410 | 0.76 |
| 7 | 1.90 | 0.354 | 0.67 |
| Terminal value 7 | 12.31 | 0.354 | 4.36 |
| Price of stock | 11.04 |
Price of stock = $11.04
Thumbs up please if satisfied. Thanks :)
Comment for further doubts
jeff jeffy answered 1 year agoRelated Solutions
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