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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 ago
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