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Company DIMOND just paid annual dividend of $5 today. The dividend is expected to grow at...

Company DIMOND just paid annual dividend of $5 today. The dividend is expected to grow at 3% for the next 5 years, then it will grow at 5% in perpetuity. If stocks of similar company earn 9% annual return, what is the price of a share of Company DIMOND stock?

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Answer #1

Recent dividend, D0 = $5.00

Growth rate for next 5 years is 3% and a constant growth rate (g) of 5%

D1 = $5.0000 * 1.03 = $5.1500
D2 = $5.1500 * 1.03 = $5.3045
D3 = $5.3045 * 1.03 = $5.4636
D4 = $5.4636 * 1.03 = $5.6275
D5 = $5.6275 * 1.03 = $5.7963
D6 = $5.7963 * 1.05 = $6.0861

Required return, r = 9%

P5 = D6 / (r - g)
P5 = $6.0861 / (0.09 - 0.05)
P5 = $152.1525

P0 = $5.15/1.09 + $5.3045/1.09^2 + $5.4636/1.09^3 + $5.6275/1.09^4 + $5.7963/1.09^5 + $152.1525/1.09^5
P0 = $120.05

Price per share = $120.05

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