Question

A firm does not pay a dividend. It is expected to pay its first dividend of $0.36 per share in two years. This dividend will grow at 8 percent indefinitely. Use a 9.5 percent discount rate. Stock Value:

Answer 1

Expected Price at Year 2 = Expected Dividend / ( Required Return - Growth rate)

= ($ 0.36*108%) /( 9.5% -8%)

= $25.92

Present Value of Dividend = $ 0.36 * Present Value of Discounting Factor ( 8% ,2)

= $ 0.36 * 1/(1.095) ^ 2

= $ 0.300243948

Present Value Share Price in Year 2 = Expected Price at Year 2 * Present Value of Discounting Factor ( 8% ,2)

= $25.92* 1/(1.095) ^ 2

= $ 21.61756427

Hence Stock Value = Present Value of Dividend +Present Value Share Price in Year 2

= $ 0.300243948+$ 21.61756427

= $ 21.92

Hence the correct answer is $ 21.92