IBM will pay its first dividend of 1.00, two years from today. The dividends will grow...

IBM will pay its first dividend of 1.00, two years from today. The dividends will grow at a rate of 5% per annum until the 7th year. After that, the dividends will grow at a rate of 3% until the end of the 15th year.After that the dividends will grow at a rate of 2% forever. Of return of IBM stock is 10% per annual what should be the Pv of the stock?

Solutions

Expert Solution

Dividend and its present value
Year	Dividend	PVF at 10%	Present value
1	0	0.909091	0
2	1	0.826446	0.826446
3	1.05	0.751315	0.788881
4	1.1025	0.683013	0.753022
5	1.157625	0.620921	0.718794
6	1.215506	0.564474	0.686122
7	1.276282	0.513158	0.654934
8	1.31457	0.466507	0.613257
9	1.354007	0.424098	0.574231
10	1.394627	0.385543	0.537689
11	1.436466	0.350494	0.503473
12	1.47956	0.318631	0.471433
13	1.523947	0.289664	0.441433
14	1.569665	0.263331	0.413342
15	1.616755	0.239392	0.387038
Present value of dividend			8.37

Expected dividend of Year-16 = 1.62 + 2% = 1.65
Horizon Value = Expected dividend /(Required rate-growth rate)
	1.65 / (10-2)% = 20.63 per share

Present value of horizon value = 20.63 *0.239392 = 4.94

Price of Stock = 8.37 +4.94 = 13.31

Answer is $ 13.31

jeff jeffy answered 11 months ago

Next > < Previous

Related Solutions

Lincoln Motors does not pay dividends currently but plans to pay its first dividend of $1.00...

Lincoln Motors does not pay dividends currently but plans to pay its first dividend of $1.00 three years from today (D3). The dividend will grow at 10% in years 4 and 5 and after year 5 will grow at 3% forever. Find the price per share of Lincoln Motors if the required rate of return is 8%.

The Market Place recently announced that it will pay its first annual dividend three years from today.

The Market Place recently announced that it will pay its first annual dividend three years from today. The first dividend will be $0.05 a share with that amount quadrupling each year for the following four years. After that, the dividend is expected to increase by 1 percent annually. What is the value of this stock today if the required return is 20 percent?Group of answer choices$24.08$80.84$7.22$68.08$17.01

1) IBM expects to pay a dividend of $5 next year and expects these dividends to...

1) IBM expects to pay a dividend of $5 next year and expects these dividends to grow at 77% a year. The price of IBM is $85 per share. What is IBM's cost of equity capital? 2) Since your first birthday, your grandparents have been depositing $1,200into a savings account on every one of your birthdays. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings...

1) ABC Inc. will pay its first annual dividend of $3 one year from today. In...

1) ABC Inc. will pay its first annual dividend of $3 one year from today. In the second year, the dividend will be $3.5. Dividends for year 3 and year 4 will be $4 and $5, respectively. After that, the dividends will decline at a constant rate of 3% per year till year 8. Thereafter, the dividends will grow at a constant rate of 5% per year forever. If the discount rate used is 10%, what is the stock price...

Green Tree Corporation is paying a dividend of $4 today. It expects dividends to grow at...

Green Tree Corporation is paying a dividend of $4 today. It expects dividends to grow at 25 percent for the next three years and to stabilize at 10 percent per year thereafter. If the required rate of return of this corporation is 15 percent, what is the current price of this corporation's stock? What percentage of the current stock price is due to the dividends in the first three years? What percentage of the current stock price is due to...

The stock will pay a $20 dividends per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay?

Valuing Preferred Stock: I-Eyes.com has a new issue of perferred stock it calls 20/20 preferred. The stock will pay a $20 dividends per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay?

Today is T=0. A company paid a dividend of $2.40 yesterday. Dividends are expected to grow...

Today is T=0. A company paid a dividend of $2.40 yesterday. Dividends are expected to grow at a rate of 10% for three years, 8% for one year and then at a rate of 6%, forever. The required return is 13% and is never expected to change. Estimate the equilibrium price of a share of stock at T=0.

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow...

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 6%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.86. a. Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market capitalization rate. % b. What is the intrinsic value of the stock? (Do not...

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?

A fast growth has the first dividend (t=1) of $3.10. Dividends are then expected to grow...

A fast growth has the first dividend (t=1) of $3.10. Dividends are then expected to grow at a rate of 8 percent p.a. for a further 4 years. it then will settle to a constant-growth rate of 1.8 percent. If the required rate of return is 19 percent, what is the current price of the share? (to nearest cent)

Subjects