Acceleron incorporated has just paid annual dividend of $1.50. Analysts predict dividends will grow by $0.12...

Acceleron incorporated has just paid annual dividend of $1.50. Analysts predict dividends will grow by $0.12 per year for the next seven years. After that, they expect earnings to grow by 4% per year, and the dividend payout rate to remain constant. If Acceleron's equity cots of capital is 8.5% per year, what price should Acceleron stock sell for today?

Expert Solution

$ 40.49

Working;

As per dividend discount method, current stock price is the present value of dividends.

Step-1:Present value of next 7 year's dividend

	Year	Dividend	Present value of 1	Present value of dividend
	a	b	c=1.085^-a	d=b*c
	1	$ 1.62	0.9217	$ 1.49
	2	$ 1.74	0.8495	$ 1.48
	3	$ 1.86	0.7829	$ 1.46
	4	$ 1.98	0.7216	$ 1.43
	5	$ 2.10	0.6650	$ 1.40
	6	$ 2.22	0.6129	$ 1.36
	7	$ 2.34	0.5649	$ 1.32


	Total			$ 9.94

	Working:
	Dividend of:
	Year
	1		=	$ 1.50	+	$ 0.12	=	$ 1.62
	2		=	$ 1.62	+	$ 0.12	=	$ 1.74
	3		=	$ 1.74	+	$ 0.12	=	$ 1.86
	4		=	$ 1.86	+	$ 0.12	=	$ 1.98
	5		=	$ 1.98	+	$ 0.12	=	$ 2.10
	6		=	$ 2.10	+	$ 0.12	=	$ 2.22
	7		=	$ 2.22	+	$ 0.12	=	$ 2.34


Step-2:Terminal value of dividend at the end of year 7

	Terminal Value		=	D7*(1+g)/(Ke-g)		Where,
			=	2.34*(1+0.04)/(0.085-0.04)		D7	Year 3 dividend		$ 2.34
			=	$ 54.08		g	Growth rate		4%
						Ke	Required Return		8.5%

Step-3:Present value of terminal value

	Present value		=	Terminal value at the end of Year 3*Present value of 1
			=	$ 54.08	*	0.5649
			=	$ 30.55
	Working:

	Present value of 1		=	(1+i)^-n		Where,
			=	(1+0.085)^-7		i	8.5%
			=	0.5649		n	7


Step-4:Present value of all dividends

	Present value of all dividends			=	$ 9.94	+	$ 30.55
				=	$ 40.49

	Thus,
		Current selling price of stock is			$ 40.49

jeff jeffy answered 1 year ago

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