Question 1 Alphabet Inc. will not pay it\'s first dividend until ten years from

Question

Question 1

Alphabet Inc. will not pay it's first dividend until ten years from now. The first dividend received in 10 years (Year 10) is expected to be $120. Dividends are expected to grow at 4% forever after this first dividend payment. The required rate of return for similar stocks is 15%. What is the current value of Alphabet, Inc. stock?

Question 2

Snoke Inc's will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What will Snoke's dividend be in 100 years? (Year 100)?

Question 3

Snoke Inc's will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What is Snoke's estimated stock price as of today (Year 0 Estimated Price of Stock)?

Explanation / Answer

Question 1:

Dividend paid in Year 10 = 120

Growth rate = 4%

Required rate of return for similar stocks = 15%

Dividend for 11th year = 120*1.04 = 124.8

Value of stock at the end of 10th year = Dividend for 11th year/(Required rate - growth rate)

= 124.8/(15% - 4%) = 124.8/11% = 1134.55

Current value of stock = Value of stock at the end of 10th year /(1+r)^n

= 1134.55/(1+0.15)^10 = 1134.55*(1/(1.15)^10) = 1134.55*0.2471 = 280.35

Current value of stock is $280.35

Question 2:

Dividend next year (D1) = $10

Required rate of return = 10%

Growth rate = 5%

Snoke's dividend be in 100 years = 10*(1.05)^99 = 10*125.2393 = 1252.393

Question 3:

Dividend next year (D1) = $10

Required rate of return = 10%

Growth rate = 5%

Snoke's estimated stock price as of today = D1/(Required rate of return - Growth rate)

= 10/(10% - 5%) = 10/5% = 200

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