Question

Flounder Inc. has just paid a dividend of $5.10. An analyst forecasts annual dividend growth of 7 percent for the next five years; then dividends will decrease by 1 percent per year in perpetuity. The required return is 10 percent (effective annual return, EAR). What is the current value per share according to the analyst?

Answer #1

D1=(5.1*1.07)=5.457

D2=(5.457*1.07)=5.83899

D3=(5.83899*1.07)=6.2477193

D4=(6.2477193*1.07)=6.68505965

D5=(6.68505965*1.07)=7.15301383

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(7.15301383*(1-0.01)/(0.1-(0.01)

=7.08148369/0.11

=64.3771245

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

=5.457/1.1+5.83899/1.1^2+6.2477193/1.1^3+6.68505965/1.1^4+7.15301383/1.1^5+64.3771245/1.1^5

**=$63.46(Approx)**

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