According to your research, the growth rate in dividends for SIR for the next fi

Question

According to your research, the growth rate in dividends for SIR for the next five years is expected to be 20 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.25 percent indefinitely. Assume investors require a return of 15 percent on SIR stock.

According to the dividend growth model, what should the stock price be today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

You’ve collected the following information from your favorite financial website.

Explanation / Answer

D0 = $2.45

Dividend from year 5 onwards is the present value of all future Dividends in the year 5 and is computed as below.

Dividend in the year 5 = (6.10 x 1.0525)/(0.15 - 0.0525) = $65.81

Thus, the stock price today should be $46.66

Year Dividend PVF @ 15% Present Value 1 2.94 0.870 2.56 2 3.53 0.756 2.67 3 4.23 0.658 2.78 4 5.08 0.572 2.90 5 6.10 0.497 3.03 5 onwards 65.81 0.497 32.72 Stock Price 46.66

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