Question

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 11% per year for the next 6 years and then decreasing the growth rate to 4% per year forever after. The company just paid its annual dividend in the amount of $1.32 per share. What is the current value of one share if the required rate of return is 9%?

Answer 1

D1=(1.32*1.11)=1.4652

D2=(1.4652*1.11)=1.626372

D3=(1.626372*1.11)=1.80527292

D4=(1.80527292*1.11)=2.003852941

D5=(2.003852941*1.11)=2.224276765

D6=(2.224276765*1.11)=2.468947209

Value after year 6=(D6*Growth Rate)/(Required rate-Growth Rate)

=(2.468947209*1.04)/(0.09-0.04)

=$51.35410195

Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.4652/1.09+1.626372/1.09^2+1.80527292/1.09^3+2.003852941/1.09^4+2.224276765/1.09^5+2.468947209/1.09^6+$51.35410195/1.09^6

=$39.07(Approx).