Question

A company is going to pay a $2 dividend for the next 10 years (year-end). After...

A company is going to pay a $2 dividend for the next 10 years (year-end). After that, the dividend will grow at a rate of 2% forever. How the stock price will change if the required rate of return of the market goes from 5% to 10%?

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Answer #1

  

_______________________________

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Value of Stock today = PV of Dividend till 10 years + Terminal Vlaue

  

At 5%

= 2 * PVAF (5%, 10 years) + Dividend * (1+G) / Required return - G

= (2 * 7.72173492899) + (2 * (1+0.02) / 0.05 - 0.02)

= 15.4434698579 + 68

= 83.44

At 10%

= 2 * PVAF (10%, 10 years) + Dividend * (1+G) / Required return - G

= (2 * 6.14456710558) + (2 * (1+0.02) / 0.10 - 0.02)

= 12.2891342111 + 25.5

= 37.79

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