Question

Suppose that a company announced that it will pay a dividend next
year of 5KD. Then the company will increase it's dividend by 6% per
tear for two years after which it will maintain a constant 4%
dividend growth rate. What is one share worth today at a required
rate of return of 15%?

Answer #1

Value of stock means present value of all future cash flows from stock.

Here next year dividend will be 5kd. After two years dividend will be increase by 6%, after that dividend will grow at constant rate @4%

D1 = 5kd

D2 = 5kd * (1.06) = 5.3 kd

D3 = 5.3 kd * (1.06) = 5.618 kd

D4 = 5.618 * (1.04) = 5.84272 kd

From D4, dividends grow at 4% per year.

Present value of dividends from D4 at end of the D3 period = D4 / (r-g) = 5.84272 / ( 0.15 - 0.04)

Present value of dividends from D4 at end of the D3 period = 53.1156364 kd

Particulars | Dividend | PVF@15% | present value of dividends |

D1 | 5 kd | 0.869565217 | 4.34782609 |

D2 | 5.3 kd | 0.756143667 | 4.00756144 |

D3 | 5.618 kd | 0.657516232 | 3.69392619 |

Present value of dividends from D4 at end of the D3 period | 53.1156364 kd | 0.657516232 | 34.9243931 |

Total | 46.9737068 |

Value of stock today = 46.9737068 kd

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