Question

A company has just paid its first dividend of $3.71. Next year's dividend is forecast to grow by 9 percent, followed by another 9 per cent growth in year two. From year three onwards dividends are expected to grow by 2.2 percent per annum, indefinitely. Investors require a rate of return of 16 percent p.a. for investments of this type. The current price of the share is (round to nearest cent)

Answer 1

Statement showing Price of stock today

Year	Dividend	PVIF @ 16%	PV
1	3.71 x 1.09	4.04	0.8621	3
2	4.04 x 1.09	4.41	0.7432	3
Horizon value (WN 1)		32.66	0.7432	24
Price of stock today	31

Thus current price of stock = $31

WN 1) Horizon Value = Dividend for year 3 /Ke-g

g= growth raet = 2.2%

Ke = required return = 16%

Dividend for year 3 = Dividend for year 2(1+g)

=4.41(1+2.2%)

=4.41(1.022)

=4.51 $

Thus, horizon value = 4.51/16%-2.2%

=4.51/13.80%

=32.66 $