Marigold Mechanical Inc.’s first dividend of $1.40 per share is expected to be paid six years...

Marigold Mechanical Inc.’s first dividend of $1.40 per share is expected to be paid six years from today. From then on, dividends will grow by 10 percent per year for five years. After five years, the growth rate will slow to 5 percent per year in perpetuity. Assume that Marigold’s required rate of return is 16 percent. What is the price of a share of Marigold Mechanical today? (Round present value factor calculations to 5 decimal places, e.g. 1.15612. Round other intermediate calculations to 3 decimal places, e.g. 1.156 and final answer to 2 decimal places, e.g.115.61.)

Price of the stock

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Expert Solution

Question ask for share price of Marigold Machanical.

Price of any security is the present value of the future cash that the secuity is going to genrated discounted at required rate of return

First See the timeline of Dividends as below:

Timing	Dividend	Dividend Amount
T0	D0	0
T1	D1	0
T2	D2	0
T3	D3	0
T4	D4	0
T5	D5	0
T6	D6	1.400
T7	D7=1.4x1.10	1.540
T8	D8=1.540x1.10	1.694
T9	D9=1.694x1.10	1.863
T10	D10=1.863x1.10	2.050
T11	D11=2.050x1.10	2.255

After 11th year Dividend will grow at contant rate of 5% .

1. First Calculate the Value of share at Time 10 using Gordan growth formula.

GG formula =

P0 = Price of share today , D1= Dividend after 1 year, Ke= Cost of capital or required rate of return

g is Growth .

P0 above to be replace with P10 and D1 with D11 because we are calculating price at Time 10

So formula looks as

= 2.255 / ( 0.16 - 0.05)

= 2.255 / 0.11

Price of share at Time 10 = 20.5

2. Now calculate the present value of Dividends from Time 6 to Time 10 with Share value at Time 10.

PV =

PV = 0.575 + 0.545 + 0.517 + 0.490 + 0.465 + 4.647

Price of share = 7.24

jeff jeffy answered 1 year ago

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