Question

**Please show calculations for this problem**

1. Calculate today’s stock price for PEG if last period’s dividend was $1.48 and its dividend growth forever is expected to be 6.0% (assuming a required rate of return of 9%)?

- Using the above assumptions, how would you partition PEG’s required rate of return…in terms of its dividend yield and capital gains growth rate? Please compute.

- If PEG’s dividend was expected to grow at 18% for the next 2 years…and then return to a constant growth rate of 6% thereafter, what would you model its stock price to be (again, assuming a required rate of return of 9% and D0 of $1.48).

Answer 1

1. Today's Stock Price =Last Dividend*(1+g)/(Required Rate-g) =1.48*(1+6%)/(9%-6%) =52.2933 or 52.29
Dividend Yield =Last Dividend*(1+g)/Price =1.48*(1+6%)/52.2933 =3%
Capital gain =Growth of dividend =6%
Total Required Rate of Return =Dividend Yield+Capital Gain =3%+6% =9%

2. Dividend year 1 =Last Dividend*(1+g) =1.48*1.18
Dividend year 2 =Last Dividend*(1+g)^2 =1.48*1.18^2
Dividend year 3 =Last Dividend*(1+g)^2 *(1+g2)=1.48*1.18^2*(1.06)=2.1844
Terminal Value =Dividend Year 3/(Required Rate-growth) =2.1844/(9%-6%) =72.8133
Price of Stock =1.48*1.18/1.09+1.48*1.18^2/1.09^2+72.8133/(1+9%)^2 =64.62