Question

Arcs and Triangles paid an annual dividend of $11.47 a share yesterday. The company is planning on paying $11.82, $12.55, $12.63, and $13.65 a share over the next four years, respectively. After that, the dividend will be constant at $14.70 per share per year.What is the market price of this stock if the market rate of return is 12 percent?

Answer 1

Price of the stock is calculated by solving the below equation:

at the end of year 4, we need to calculate the terminal value of the constant dividend from then onwards. This is calculated by This then is discounted back for 4 years to time 0 to find the PV.

Below is the scedule to verify:

Year	CF	Discount Factor	Discounted CF
0	$          -	1/(1+0.12)^0=	1	1*0=	$          -
1	$   11.82	1/(1+0.12)^1=	0.892857143	0.892857142857143*11.82=	$   10.55
2	$   12.55	1/(1+0.12)^2=	0.797193878	0.79719387755102*12.55=	$   10.00
3	$   12.63	1/(1+0.12)^3=	0.711780248	0.711780247813411*12.63=	$      8.99
4	$   13.65	1/(1+0.12)^4=	0.635518078	0.635518078404831*13.65=	$      8.67
4	$122.50	1/(1+0.12)^4=	0.635518078	0.635518078404831*122.5=	$   77.85
				NPV = Sum of all Discounted CF	$ 116.07