Question

In: Finance

CX Enterprises has the following expected​ dividends: $1.15 in one​ year, $1.24 in two​ years, and...

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 $

Solutions

Expert Solution

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

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