DCI will pay a dividend of $2.50 a share now, continuing a long-term growth tren

Question

DCI will pay a dividend of $2.50 a share now, continuing a long-term growth trend of 10% per year. If this trend is expected to continue indefinitely, and investors required rate of return for DCI is 12%..

A) What is the market value per share of DCI's common stock?

B) What is the market value per share of DCI's common stock if required rate of return is 16%?

C) If there is expected to be non constant growth of 20% for the first year, then 18% for the next year, and then 16% for the next year, finally stablizing to a constant growwth of 10% per year in the 4th year what is the market value per share?

Explanation / Answer

A)current price = D1 /(Rs - g)

                      = 2.50 / (.12 -.10)

                      = 2.50 /.02

                       = $ 125 per share

B)Current price = 2.5 /(.16 -.10)

                        = 2.5 / .06

                        = $ 41.67 per share

C)

4.1064 [3.54(1+.16)]

Terminal value =D3 (1+.1 )/ (.12-10)

                    = 4.1064 *1.1 / .02

                     = 225.852

year Dividend present value @ 12% present value of dividend 1 3       [2.5(1+.2)] .89286 2.679 2 3.54   [3(1+.18)] .79719 2.822 3

4.1064 [3.54(1+.16)]

.71178 2.923 3Terminal value 225.852 .71178 160.757 Current value 169.18 per share

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