In: Finance
CX Enterprises has the following expected dividends: $1.15 in one year, $1.24 in two years, and $1.32 in three years. After that, its dividends are expected to grow at 4.1% per year forever (so that year 4's dividend will be 4.1% more than $1.32 and so on). If CX's equity cost of capital is 11.7%, what is the current price of its stock?
The price of the stock will be $
As per dividend discount method, current stock price is the present value of dividends. | ||||||||||||
Step-1:Present value of next 3 year's dividend | ||||||||||||
Year | Dividend | Present value of 1 | Present value of dividend | |||||||||
a | b | c=1.117^-a | d=b*c | |||||||||
1 | $ 1.15 | 0.895 | $ 1.03 | |||||||||
2 | $ 1.24 | 0.801 | $ 0.99 | |||||||||
3 | $ 1.32 | 0.718 | $ 0.95 | |||||||||
Total | $ 2.97 | |||||||||||
Step-2:Terminal value of dividend at the end of year 3 | ||||||||||||
Terminal Value | = | D3*(1+g)/(Ke-g) | Where, | |||||||||
= | 1.32*(1+0.041)/(0.117-0.041) | D3 | Year 3 dividend | $ 1.32 | ||||||||
= | $ 18.08 | g | Growth rate | 4.1% | ||||||||
Ke | Required Return | 11.7% | ||||||||||
Step-3:Present value of terminal value | ||||||||||||
Present value | = | Terminal value at the end of Year 2*Present value of 1 | ||||||||||
= | $ 18.08 | * | 0.7175 | |||||||||
= | $ 12.97 | |||||||||||
Working: | ||||||||||||
Present value of 1 | = | (1+i)^-n | Where, | |||||||||
= | 1.117^-3 | i | 11.7% | |||||||||
= | 0.717530689 | n | 3 | |||||||||
Step-4:Present value of all dividends | ||||||||||||
Present value of all dividends | = | $ 2.97 | + | $ 12.97 | ||||||||
= | $ 15.94 | |||||||||||
Thus, | ||||||||||||
The stock's current price (Price at year 0) should be | $ 15.94 | |||||||||||