Reitmans Ltd. currentlly has an annual dividend of $2.30. The discount rate for Reitmans is 8%....

Reitmans Ltd. currentlly has an annual dividend of $2.30. The discount rate for Reitmans is 8%. Dividends are expected to grow by 20% over the next three years, 15% percent for the seven years after that, and then 5% in perpetuity. Based on the current stock price of $185, would you invest in the stock today? Explain using the dividend discount model to value the stock and compare

Expert Solution

Using dividend discount model we can compute the price today
		i	ii	iii=i+ii	iv	v=iii*iv
Year	Growth rate	Dividend	Terminal value	Total cash flow	PVIF @ 8%	Present value
1	20%	2.76		2.76	0.925926	2.56
2	20%	3.31		3.31	0.857339	2.84
3	20%	3.97		3.97	0.793832	3.16
4	15%	4.57		4.57	0.73503	3.36
5	15%	5.26		5.26	0.680583	3.58
6	15%	6.04		6.04	0.63017	3.81
7	15%	6.95		6.95	0.58349	4.06
8	15%	7.99		7.99	0.540269	4.32
9	15%	9.19		9.19	0.500249	4.60
10	15%	10.57	370.02	380.59	0.463193	176.29
						208.56

Compuation of terminal value
As per DDM termial value = Dividend expected in 11th year/(required rate - growth rate)
Terminal value on 10th year =	10.57*105%/(8%-5%)
			370.02

Therefore price today =				208.56

Ans =						$ 208.56

ekkarill92 answered 10 months ago

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