Financial Technology Corp. is expected to pay a dividend of $3.30 today but dividends are expected...

Financial Technology Corp. is expected to pay a dividend of $3.30 today but dividends are expected to grow at 5% per year going forward. The required return is 9.5%. What is the price expected to be in year 4?

Expert Solution

Step1: Computation of Vaue for the 1st 4 years
Year	0	1	2	3	4	5
Dividend ($)	3.30	3.47	3.64	3.82	4.01	4.21
		(3.3*1.05)	(3.47*1.05)	(3.64*1.05)	(3.82*1.05)	(4.01*1.05)
Discount [email protected]%	1	0.9132	0.8340	0.7617	0.6956	0.6352
Present value @ 9.5%		3.16	3.04	2.91	2.79	2.67

Expected price in year 4=	Expected dividend in year 5/(ke-g)
=	4.21/(0.095-0.05)
=$	93.6

As per gordon Model, Expected price(P0)=Expected dividend in Year1/(Ke-g)
Where ke=cost of capital and g=constant growth rate.

jeff jeffy answered 1 year ago

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