Apocalyptica Corporation is expected to pay the following dividends over the nex

Question

Apocalyptica Corporation is expected to pay the following dividends over the next four years: $5.40, $16.40, $21.40, and $3.20. Afterwards, the company pledges to maintain a constant 6.00 percent growth rate in dividends, forever.

If the required return on the stock is 9 percent, what is the current share price?

Apocalyptica Corporation is expected to pay the following dividends over the next four years: $5.40, $16.40, $21.40, and $3.20. Afterwards, the company pledges to maintain a constant 6.00 percent growth rate in dividends, forever.

Explanation / Answer

In this question, we will calculate the price of the stock (current value). This is the question of non constant dividend

D1 = 5.40

D2 = 16.40

D3 = 21.40

D4 = 3.20

Calculating D5 with the growth rate of 6%

D5 = 3.20 * (1.06) = $3.392

Calculating the price of stock at year 4

P4 = D5 / (rate - growth rate)

P4 = 3.392 / (0.09 - 0.06)

= $113.07

Calculating the current price of stock

= D1 / (1+r) + D2 / (1+r)^2 + D3/(1+r)^3 + D4/(1+r)^4 + P4/(1+r)^4

= 5.40/(1+.09) + 16.40/(1+.09)^2 + 21.40/(1+.09)^3 + 3.2/(1+.09)^4 + 113.07/(1+.09)^4

= $117.65

Thus, the current value of the stock is $117.65

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