Apocalyptica Corporation is expected to pay the following dividends over the nex
ID: 2651567 • Letter: A
Question
Apocalyptica Corporation is expected to pay the following dividends over the next four years: $6.50, $17.50, $22.50, and $4.30. Afterwards, the company pledges to maintain a constant 5.00 percent growth rate in dividends, forever.
If the required return on the stock is 10 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Apocalyptica Corporation is expected to pay the following dividends over the next four years: $6.50, $17.50, $22.50, and $4.30. Afterwards, the company pledges to maintain a constant 5.00 percent growth rate in dividends, forever.
Explanation / Answer
Answer:
Calculation of Current share price :
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Dividend
$ 6.50
$ 17.50
$ 22.50
$ 4.30
$ 4.52
(4.3*105%)
Share price at the end of year 4
$ 90.40
= Dividend at the end of year 5 / (required rate - growth rate)
= 4.52 /(0.10 -0.05)
Total cash inflows (CF)
$ 6.50
$ 17.50
$ 22.50
$ 94.70
PVF (10%)
1
0.909091
0.826446
0.751315
0.683013
Present value (CF*PVF)
$ 5.91
$ 14.46
$ 16.90
$ 64.68
Current Price of the share (Sum of PVs)
$ 101.96
Calculation of Current share price :
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Dividend
$ 6.50
$ 17.50
$ 22.50
$ 4.30
$ 4.52
(4.3*105%)
Share price at the end of year 4
$ 90.40
= Dividend at the end of year 5 / (required rate - growth rate)
= 4.52 /(0.10 -0.05)
Total cash inflows (CF)
$ 6.50
$ 17.50
$ 22.50
$ 94.70
PVF (10%)
1
0.909091
0.826446
0.751315
0.683013
Present value (CF*PVF)
$ 5.91
$ 14.46
$ 16.90
$ 64.68
Current Price of the share (Sum of PVs)
$ 101.96
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