Question

Dividend one $12.00 Dividend 2 5.00 Dividend 3 7.00 Dividend 4 3.00 Dividend growth rate 4%...

Dividend one $12.00

Dividend 2 5.00

Dividend 3 7.00

Dividend 4 3.00

Dividend growth rate 4%

Required return 15%

Afterwards the company anticipates paying a constant 4%. If the required return on the stock is 15%, what is the current share price?

Year 4 price

Share price
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Homework Answers

Answer #1

Current Stock Price = Present Value of Dividends + Present Value of Share Price in Year 4

= $20.5333743089826+ $ 16.2170011477297

= $ 36.75

Hence the correct answer is $ 36.75

Share Price in Year 4 = $ 28.36363636

Hence the correct answer is $ 28.36

Note :

Present Value of Dividends

Year Dividend Discounting Factor (15%) Present Value ( Dividend * Discounting factor)
1 12.00 0.869565217 10.43478261
2 5.00 0.756143667 3.780718336
3 7.00 0.657516232 4.602613627
4 3.00 0.571753246 1.715259737
Present Value of Dividends 20.53337431

Present Value of Share Price in Year 4

Price In Year 4 = Expected Dividend / ( Required Return - Growth Rate)

= ($ 3*104%) / ( 15% -4%)

= $ 3.12 / 11%

= $ 28.36363636

Present Value of Share Price in Year 4 = Price In Year 4 * Present Value of Discounting Factor ( 15%,4)

= $ 28.36363636 * 0.571753246

= $ 16.2170011477297

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