Question

Stone Corporation is expected to pay the following dividends over the next four years: $9, $15, $17, and $3. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends, forever. If the required return on the stock is 10 percent, what is the current share price?

Answer 1

The current share price is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4/ (1 + required rate of return)⁴ + 1 / (1 + required rate of return)⁴ [ ( Dividend in year 4 (1 + growth rate) / ( required rate of return - growth rate) ]

= $ 9 / 1.10 + $ 15 / 1.10² + $ 17 / 1.10³ + $ 3 / 1.10⁴ + 1 / 1.10⁴ x [ ($ 3 x 1.05) / ( 0.10 - 0.05) ]

= $ 9 / 1.10 + $ 15 / 1.10² + $ 17 / 1.10³ + $ 3 / 1.10⁴ + $ 63 / 1.10⁴

= $ 78.43 Approximately

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