Compute the value of a share of common stock of a company whose most recent divi

Question

Compute the value of a share of common stock of a company whose most recent dividend was $2.50 and is expected to grow at 6 percent per year for the next 2 years, after which the dividend growth rate will decrease to 3 percent per year indefinitely. Assume a 10 percent required rate of return.

Explanation / Answer

Here Solution: Dividend at T1: = be 2.575 at T2 = 2.652 at T3 =2.732 at T4 = 2.814, at T5 = 2.898 Then Present Value of each dividend, at a rate of 10%. PV of dividend at : T1 - 2.341, at T2 - 2.192, at T3 - 2.053, at T4 - 1.922, at T5 - 1.799 Total PV = 10.307 Chalk out the Price of a stock at T5 with constant growth of 6%, beginning at T6. In our case: Next Div will be 2.898 + 6%, or 3.072 =>Price = Next Div / R - G Price (at T5) = 3.072 / 10% - 6%, or 3.072 / .04 = 76.80 PV of 76.80, with N of 5, rate of 10% = 47.688 So our answer becomes: Value of stock today then is 10.307 + 47.688, or $58.00

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