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A company paid a dividend of $3.00 and expects to increase dividends by 18% for the...

A company paid a dividend of $3.00 and expects to increase dividends by 18% for the next three years before leveling off at 6%.What should be the price of the stock if the required rate of return is 14%?

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Expert Solution

Price of stock should be $ 53.73

As per dividend discount model, current share price is the sum of present value of future dividends.
Step-1:Present value of dividends of next 3 years
Year Dividend Discount factor Present value
a b c=1.14^-a d=b*c
1 $ 3.5400                               0.8772 $                3.11
2 $ 4.1772                               0.7695 $                3.21
3 $ 4.9291                               0.6750 $                3.33
Total $                9.65
Step-2:Present value of dividends after year 3
Present value = D3*(1+g)/(Ke-g)*DF3 Where,
= $                             44.08 D3 = $                  4.9291
g = 6.0%
Ke = 14%
DF3 =                       0.6750
Step-3:Sum of present value of future dividends
Sum = $                               9.65 + $   44.08
= $                             53.73
So,
Price of stock is $    53.73

jeff jeffy answered 1 year ago
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