Trump Office Supplies paid a $6 dividend last year. The dividend is expected to

Question

Trump Office Supplies paid a $6 dividend last year. The dividend is expected to grow at a constant rate of 6 percent over the next four years. The required rate of return is 13 percent (this will also serve as the discoun in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formul financial calculator methods. a. Compute the anticipated value of the dividends for the next four years. (Do not round Intermedlate calculatlons. Round your final answers to 2 declmal places.) Anticipated Value D1 D2 D3 D4 b. Calculate the present value of each of the anticipated dividends at a discount rate of 13 percent. (Do not r Intermediate calculations. Round your final answers to 2 decimal places.) PV of Dividends D1 D2 D3 D4 Total c. Compute the price of the stock at the end of the fourth year (P4). (Do not round intermediate calculation Round your final answer to 2 decimal places.) Stock price at Year 4

Explanation / Answer

a.Dividend for next 4 years

Dn+1 = Dn * ( 1 + g )

where g = growth rate

b. Present Value of dividends

c. Price of stock at the end of year 4

P4 = D5 / (Ke - g)

Where P4 = Price of stock at the end oy year 4

D5 = Dividend for 5th year

Ke = Required rate of return

g = growth rate

Therefore P4 = ( $7.58 * 1.06) / ( 0.13 - 0.06)

= $8.0348 / 0.07

= $114.78

d. Present value of year 4 stock price

= P4 * Present value factor @13% for 4th year

= $114.78 * 0.613

=$ 70.36

e. Current price of stock

= Present Value of Dividends for 4 years + Present Value of year 4 stock price

= $(5.6286 + 5.27742 + 4.95495 + 4.64654 ) + $70.36

= $20.50751 + $ 70.36

= $90.87

f. finding current stock price as per the formula given

P0 = D1 / (Ke - g)

= $6.36 / (0.13 - 0.06 )

= $6.36 / 0.07

= $90.86

Therefore this gives approximately the same answer as that in e

g. Current EPS $7.3 given

P/E ratio 1.25 times higher than = 10 * 1.25

Therefore P/E ratio = 12.5

Now P/E ratio = Price / Earnings

so 12.5 = Price / 7.3

So Price = 12.5 * 7.3

= $91.25

h. The stock price in part g is higher than in part f by $(91.25 - 90.86) = $0.39

i. stock price movement direction

Particulars Working Dividend (in$) D1 6 * 1.06 6.36 D2 6.36 * 1.06 6.74 D3 6.74 * 1.06 7.15 D4 7.15 * 1.06 7.58

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