Deja Brew Coffee Manufacturing Corporation is expected to pay the following dividends over the next six...

Deja Brew Coffee Manufacturing Corporation is expected to pay the following dividends over the next six years: $5, $13, $18, $11, $21 and $3.45. Afterward, the company pledges to maintain a constant 7 percent growth rate in dividends, forever. If the required return on the stock is 9% percent, what is the share price in year 6, P6? What is the current share price, P0? Show all work and be descriptive please!

Expert Solution

Share price in year 6 (P6)

Dividend per share in Year 6 (D6) = $3.45 per share

Dividend Growth Rate after 6^th year (g) = 7.00% per year

Required Rate of Return (Ke) = 9.00%

Therefore, the Share price in year 6 (P6) = D6(1 + g) / (Ke – g)

= $3.45(1 + 0.07) / (0.09 – 0.07)

= $3.6915 / 0.02

= $184.58 per share

The current share price (P0)

As per Dividend Discount Model, the Current Share Price the Present Value of the future dividend payments and the present value the stock price for the year 4

Year	Cash flow ($)	Present Value factor at 9.00%	Present Value of cash flows ($)

1	5.00	0.91743	4.59
2	13.00	0.84168	10.94
3	18.00	0.77218	13.90
4	11.00	0.70843	7.79
5	21.00	0.64993	13.65
6	3.45	0.59627	2.06
6	184.58	0.59627	110.06

TOTAL			162.98

“The current share price (P0) will be $162.98 per share”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

jeff jeffy answered 1 year ago

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