Beachmaster Suntan Oil’s dividend is expected to grow at a 20% rate each of the next...

Beachmaster Suntan Oil’s dividend is expected to grow at a 20% rate each of the next 2 years. After that, dividend growth is expected to normalize at about 6.5% annually. Beachmaster just paid a $1.25 annual dividend per share. The require rate of the return of the stock is 12%. What is your estimated stock price today?

Solutions

Expert Solution

Step-1, Dividend for the next 2 years

Dividend in Year 1 (D1) = $1.50 per share [$1.25 x 120%]

Dividend in Year 2 (D2) = $1.80 per share [$1.50 x 120%]

Step-2, The Price of the stock in year 2 (P2)

Dividend Growth Rate after 2 years (g) = 6.50% per year

Required Rate of Return (Ke) = 12%

Therefore, the Share Price in year 2(P2) = D2(1 + g) / (Ke – g)

= $1.80(1 + 0.0650) / (0.12 – 0.0650)

= $1.9170 / 0.0550

= $34.85 per share

Step-3, Price of the stock today

As per Dividend Discount Model, The Current Price per share is the aggregate of the Present Value of the future dividend payments and the present value the share price in year 2

Year	Cash flow ($)	Present Value factor at 12%	Present Value of cash flows ($)

1	1.50	0.89286	1.34
2	1.80	0.79719	1.43
2	34.85	0.79719	27.79

TOTAL			30.56

“Therefore, the estimated stock price today will be $30.56 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 9 months ago

Next > < Previous

Related Solutions

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5%...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5% forever. What is the value of this promised dividend stream if the discount rate is a) 8% b) 5% c) 3%

12. XYZ, Inc. just paid $2.00 dividend. Dividends are expected to grow at a 20% rate...

12. XYZ, Inc. just paid $2.00 dividend. Dividends are expected to grow at a 20% rate for the next five years. After that, the company has stated that the annual dividend will be $2.50 per share indefinitely. The required rate of return is 10%. (a) What is this stock worth to you per share today? (b) What is the expected stock price next year? (c) What is the expected stock price 20 years from today? Could you explain the question...

Jim Ltd.’s next dividend will be $4, the dividend is expected to grow at 8% p.a.,...

Jim Ltd.’s next dividend will be $4, the dividend is expected to grow at 8% p.a., for the following 4 years. After that the growth rate in dividends will be 4% per year indefinitely. Required rate of return is 10% p.a. Question: Calculate the current value of Jim Ltd.’s shares

A stock is expected to grow at a rate of 22% for the next three years....

A stock is expected to grow at a rate of 22% for the next three years. A recent dividend paid was $1.35 per share. After three years, the stock is expected to grow at a constant rate of 12% per year. If the minimum acceptable rate of return is 14%, what is the current expected price? Show all work.

Dividends are expected to grow at 1.7% rate indefinitely, and the last dividend was $6. If...

Dividends are expected to grow at 1.7% rate indefinitely, and the last dividend was $6. If the relevant risk return is 5%, what would you be willing to pay for the stock. A) $120.000 B) S122.000 C) $181.818 D) $184.909 E) $ 5.811

The Apple just paid a $0.8 quarterly dividend. The dividends are expected to grow at 20%...

The Apple just paid a $0.8 quarterly dividend. The dividends are expected to grow at 20% per year for the next 3 years. After that, the growth rate is expected to go down to the industry average of 8% per year and stay at this level forever. The required rate of return on Apple is 15% per annum. 1.Draw the time line, showing dividends of Apple. 2.Find the price of Apple stock. 3.Find the value of its growth opportunities (PVGO)....

Suppose the company just paid dividend of $1. The dividends are expected to grow at 20%...

Suppose the company just paid dividend of $1. The dividends are expected to grow at 20% in Year 1 and 15% in Year 2. After that, the dividends will grow at a constant rate of 5% forever. If the required rate of return is 10%, compute today's price of the stock. Suppose the company just paid dividend of $1. The dividends are expected to grow at 25% in Year 1 and 20% in Year 2, and 15% in Year 3....

Miller Corporation's next dividend is expected to be $7.Dividend growth is estimated at 22%, 20%,...

Miller Corporation's next dividend is expected to be $7. Dividend growth is estimated at 22%, 20%, 10% and then expected to stabilize to 3%. The required rate of return is 10%.a. Calculate the dividend in the first, second, third, fourth and fifth years. Show all your work. (1 point)b. Using your answers in a), calculate what price would you be willing to pay for this stock today. Show all your work. (2 points)

ABC company’s dividend is projected to be $2 next year (t=1) and is expected to grow...

ABC company’s dividend is projected to be $2 next year (t=1) and is expected to grow by 10% for the following years (from t=2 to ∞). 22. What is the expected dividend in year 3? $ 4.46 $ 4.72 $ 4.29 $ 2.16 23. If the discount rate is 13%, what is the estimate of the stock price? $ 66.67 $ 129.79 $ 86.58 $ 99.68 24. Marquis Jewelers has expected earnings per share of $2.80 and an expected earnings...

Trump Office Supplies paid a $10 dividend last year. The dividend is expected to grow at a constant rate of 9 percent over the next four years.

Trump Office Supplies paid a $10 dividend last year. The dividend is expected to grow at a constant rate of 9 percent over the next four years. The required rate of return is 17 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the anticipated value of the dividends for the next four years. (Do...

Subjects