Question

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.60 per share. What is the current value of one share of this stock if the required rate of return is 8.10 percent?

Answer 1

The current value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4/ (1 + required rate of return)⁴ + 1 / (1 + required rate of return)⁴[ ( Dividend in year 4 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 2.60 x 1.19) / 1.0810 + ($ 2.60 x 1.19²) / 1.0810² + ($ 2.60 x 1.19³) / 1.0810³ + ($ 2.60 x 1.19⁴) / 1.0810⁴ + 1 / 1.0810⁴ x [ (($ 2.60 x 1.19⁴ x 1.03) / (0.0810 - 0.03) ]

= $ 3.094 / 1.0810¹ + $ 3.68186 / 1.0810² + $ 4.3814134 / 1.0810³ + $ 5.213881946 / 1.0810⁴ + 1 / 1.0810⁴ x [ $ 33.56436503 ]

= $ 3.094 / 1.0810¹ + $ 3.68186 / 1.0810² + $ 4.3814134 / 1.0810³ + $ 38.77824697 / 1.0810⁴

= $ 37.88 Approximately

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