Company XYZ paid the following dividends from year 1 to year 5: 1.50 1.66 1.66 1

Question

Company XYZ paid the following dividends from year 1 to year 5:  1.50        1.66        1.66        1.68        1.98

(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16) Include all relative formulas and show work)

a)      Find dividend growth

b)      Find the value of the stock assuming that: company will pay a constant dividend of 1.98 and that you require 14% return on the stock

c)       Find the value of the stock using dividend growth from part (a) assuming you require 14% return on the stock.

Explanation / Answer

a) 1.66= 1.5x(1+g)

g= 10.67%

b) Value= 1.98/.14= $14.143

c) Value= 1.5/1.14+(1.66/1.14^2)+(1.66/1.14^3)+(1.68/1.14^4)+(1.98/1.14^5)= $ 5.737

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