A company is expected to pay their first annual dividend three years from now. T
ID: 2643361 • Letter: A
Question
A company is expected to pay their first annual dividend three years from now. That payment will be $0.50 a share. Starting in year four, the company will increase the dividend by 4% per year. The required return is 12%. What is the estimated value of this stock today? Answer is 4.98.
How do I get that? Please show work. I am having trouble in figuring it out.
A company is expected to pay their first annual dividend three years from now. That payment will be $0.50 a share. Starting in year four, the company will increase the dividend by 4% per year. The required return is 12%. What is the estimated value of this stock today? Answer is 4.98.
How do I get that? Please show work. I am having trouble in figuring it out.
Explanation / Answer
Estimated value of this stock today = D3/(1+Re)^3 + (D4/(Re-g))/(1+Re)^3
Estimated value of this stock today = 0.50/1.12^3 + (0.50*1.04/(12%-4%))/1.12^3
Estimated value of this stock today = $ 4.98
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