In: Finance
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 10 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $10 per share 11 years from today and will increase the dividend by 7 percent per year thereafter. |
If the required return on this stock is 14 percent, what is the current share price? |
Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever. |
If the required return on the stock is 12 percent, what is the current share price? |
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 23 percent for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter. |
If the required return is 11 percent and the company just paid a $1.30 dividend. what is the current share price? |
Let the dividend for year n be denoted by Dn
Let required rate of return be r
Let Growth rate be g
(1) Given, D11 = 10, g = 7% and r = 14%
According to Gordon's Growth Formula,
P10 = D11/(r - g) = 10/(0.14 - 0.07) = $142.86
Hence, P0 = P10/(1+r)10 = 142.86/(1+0.14)10 = $38.54
Hence, Price of stock now = $38.54
(2) Given, D1 = 10, D2 = 7, D3 = 6, D4 = 2, g = 6%, r = 12%
According to Gordon's Growth Formula, P3 = D4/(r - g) = 2/(0.12 - 0.06) = $33.33
Hence, Price of stock now = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + P3/(1+r)3 = 10/(1+0.12) + 7/(1+0.12)2 + 6/(1+0.12)3 + 33.33/(1+0.12)3 = $42.50
(3) Given, D0 = $1.30, g1 = 23%, r = 11% and g2 = 6%
D1 = D0(1+g1) = 1.30(1+0.23) = $1.599
D2 = D1(1+g1) = 1.599(1+0.23) = $1.967
D3 = D2(1+g1) = 1.967(1+0.23) = $2.419
D4 = D3(1+g2) = 2.419(1+0.06) = $2.564
According to Gordon's Growth Formula, P3 = D4/(r - g) = 2.564/(0.11 - 0.06) = $51.28
Hence, Price of stock now = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + P3/(1+r)3 = 1.599/(1+0.11) + 1.967/(1+0.11)2 + 2.419/(1+0.11)3 + 51.28/(1+0.11)3 = $42.30