Question

Part a. Green Tree Corporation is paying a dividend of $4 today. It expects dividends to grow at 25 percent for the next three years and to stabilize at 10 percent per year thereafter.

a. If the required rate of return of this corporation is 15 percent, what is the current price of this corporation's stock?

b. What percentage of the current stock price is due to the dividends in the first three years?

c. What percentage of the current stock price is due to the dividends from Year 4 onwards?

d. Discuss the results of Parts b and c above.

PLEASE show how you would get answers using Excel!!

Answer 1

Answer:

Current price of this corporation's stock = $127.22

Working:

Answer b:

PV of dividends in the first three years = $14.21

Percentage of the current stock price is due to the dividends in the first three years = 14.21 /127.22 = 11.17%

Percentage of the current stock price is due to the dividends in the first three years = 11.17%

Answer c:

PV of terminal value (due to dividends from Year 4 onwards) = $113.01

Percentage of the current stock price is due to the dividends from Year 4 onwards = 113.01 /127.22 = 88.83%

Percentage of the current stock price is due to the dividends from Year 4 onwards = 88.83%

Answer d:

Current price of any stock is present value of stream of potential future cash flows. The price of this stock as at the end year 3 will be $171.875 and present value of this share value primarily (88.83%) contributes to current price.