Question

In: Finance

Red Sun Rising just paid a dividend of $2.49 per share. The company said that it...


Red Sun Rising just paid a dividend of $2.49 per share. The company said that it will increase the dividend by 25 percent and 20 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.9 percent. If the required return is 11.7 percent, what is the stock price today

Solutions

Expert Solution

Step 1: Computation of market price at the end of year 2 using Gordon Growth Mdel

P2 = D3 / (Ke – g)

Where,

P2 – share price in year 2 = ?

D3 – expected dividend in year 3 = 2.49*1.25*1.2*1.039 = 3.880665

Ke – Cost of equity = 11.7%

G – Growth rate in dividend = 3.9%

P2 = 3.880665/(.117-.039)

= 3.880665/0.078

= 49.75

Step 2: Computing current share price by discounting the cashflow at required return

Year Dividend [email protected]% Present Value (Cashflow*PVF)
1                   3.11(2.49*1.25)                 0.895 2.79
2                 53.49(3.11*1.2+49.75)                 0.801 42.87

current share price = Present Value

= 2.79+42.87

= $45.66

You can use the equation 1/(1+i)^n to find PVF using calculator


Related Solutions

Red Sun Rising just paid a dividend of $2.64 per share. The company said that it...
Red Sun Rising just paid a dividend of $2.64 per share. The company said that it will increase the dividend by 30 percent and 25 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.4 percent. If the required return is 12.2 percent, what is the stock price today?
A company just paid a dividend of $1.95 per share, and that dividend is expected to...
A company just paid a dividend of $1.95 per share, and that dividend is expected to grow at a constant rate of 4.50% per year in the future. The company's beta is 1.65, the market risk premium is 8.5%, and the risk-free rate is 6.50%. What is the company's current stock price?
A company just paid a dividend of $1.53 per share and you expect the dividend to...
A company just paid a dividend of $1.53 per share and you expect the dividend to grow at a constant rate of 5.6% per year indefinitely into the future. If the required rate of return is 13.4% per year, what would be a fair price for this stock today? (Answer to the nearest penny per share.)
A company just paid a dividend of $0.79 per share and you expect the dividend to...
A company just paid a dividend of $0.79 per share and you expect the dividend to grow at a constant rate of 5.2% per year indefinitely into the future. If the required rate of return is 12.4% per year, what would be a fair price for this stock today? (Answer to the nearest penny per share.) A 6.4% coupon bearing bond pays interest semi-annually and has a maturity of 6 years. If the current price of the bond is $1,023.87,...
The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected...
The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company's beta is 1.75, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0?
DB company just paid a dividend of $ D0 per share. It is estimated that the...
DB company just paid a dividend of $ D0 per share. It is estimated that the company's dividend will grow at a rate of 10 percent per year for the next 2 years, then the dividend is expected to grow at constant rate of 6 percent thereafter. You are also given that DB stock’s has beta of 1.2, and the expected market rate of return is 11% and the risk-free rate is 6%. Based on this, the current price of...
A company just paid a dividend of $1.30 per share. You expectthe dividend to grow...
A company just paid a dividend of $1.30 per share. You expect the dividend to grow 11% over the next year and 8% two years from now. After two years, you have estimated that the dividend will continue to grow indefinitely at the rate of 5% per year. If the required rate of return is 12% per year, what would be a fair price for this stock today? (Answer to the nearest penny.)
Contact Corporation just paid a dividend of $1.50 per share. The company expects that the dividend...
Contact Corporation just paid a dividend of $1.50 per share. The company expects that the dividend will grow at a rate of 10% for the next two years. After year two it is expected that the dividend will decline at a rate of 3% indefinitely. If the required return is 12%, what is the value of a share of stock?
The Duo Growth Company just paid a dividend of $1.00 per share. The dividend is expected...
The Duo Growth Company just paid a dividend of $1.00 per share. The dividend is expected to grow at a rate of 23% per year for the next three years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 18% per year. a. What is your estimate of the intrinsic value of a share of the stock? (Use intermediate calculations rounded to 4 decimal places. Round your answer to 2 decimal...
A company just paid a $2 dividend per share. The dividend growth rate is expected to...
A company just paid a $2 dividend per share. The dividend growth rate is expected to be 10% for each of the next 2 years, after which dividends are expected to grow at a rate of 3% forever. If the company’s required return (rs) is 11%, what is its current stock price?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT