In: Finance
You anticipate that XSensors Co. will pay a constant dividend of $2.3 each year for the next 10 years. After that, the dividend will increase to $4.65 and hold steady for another 10 years. After that, you expect the dividend will start increasing every year at a constant rate of 2 percent per year, forever. Your discount rate for this stock is 12.2 percent. How much are you willing to pay for this stock today?
12.20% | 2% | |||||||||||||||||||||||||
Year1 | Year2 | Year3 | Year4 | Year5 | Year6 | Year7 | Year8 | Year9 | Year10 | Year11 | Year12 | Year13 | Year14 | Year15 | Year16 | Year17 | Year18 | Year19 | Year20 | Year21 | Year26 | |||||
2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.74 | ||||||
46.5 | TV at Year 20 | |||||||||||||||||||||||||
Dividend with TV | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 4.65 | 51.15 | ||||||
npv | $25.78 | |||||||||||||||||||||||||
TV= Terminal value which is calculated at year 20 because after this year, growth rate is constant forever. Discount rate is 12.2%
NPV is calculated by excel formula =
=NPV(rate, Value1, value2, value3,....value20)