Question

Sengupta Co. just paid a dividend of $1.22 per share. Dividends are expected to grow at 35% for the next 5 years, followed by 20% growth for another 5 years, before leveling off to 2.5% growth, indefinitely. Assume the required rate of return on the investment is 8%. Calculate the price per share. (Round to 3 decimals)

Answer 1

D1=(1.22*1.35)=$1.647

D2=(1.647*1.35)=$2.22345

D3=(2.22345*1.35)=$3.0016575

D4=(3.0016575*1.35)=$4.052237625

D5=(4.052237625*1.35)=$5.470520794

D6=(5.470520794*1.2)=$6.564624953

D7=(6.564624953*1.2)=$7.877549943

D8=(7.877549943*1.2)=$9.453059932

D9=(9.453059932*1.2)=$11.34367192

D10=(11.34367192*1.2)=$13.6124063

Value after year 10=(D10*Growth rate)/(Required return-Growth rate)

=(13.6124063*1.025)/(0.08-0.025)

=$253.6857538

Hence price per share=Future dividends*Present value of discounting factor(8%,time period)

=$1.647/1.08+$2.22345/1.08^2+$3.0016575/1.08^3+$4.052237625/1.08^4+$5.470520794/1.08^5+$6.564624953/1.08^6+$7.877549943/1.08^7+$9.453059932/1.08^8+$11.34367192/1.08^9+$13.6124063/1.08^10+$253.6857538/1.08^10

which is equal to

=$155.842(Approx).