Question

Verona Industries just paid a dividend of $1.80. You expect the dividend to grow at 12%...

Verona Industries just paid a dividend of $1.80. You expect the dividend to grow at 12% for the next two years, and then the dividend will grow at 5% for the foreseeable future. You estimate the appropriate discount rate is 10.75%. Using this information you estimate the current price for Verona is closest to: A. $37.88. B. $50.06. C. $41.53.

Homework Answers

Answer #1
Given data
Dividend Paid (Do) $1.80
Dividend growth year 1 & 2 12%
After year 2 Dividend growth rate (g) 5%
Discount rate ( r ) 10.75%
Year Particular Dividend Value Present Value formula Present Value
1 Dividend (D1) = D0*(1+g) =1.80*(1+12%) $2.02 =2.02/(1+10.75%)^1 $1.82
2 Dividend (D2) = D1*(1+g) =2.02*(1+12%) $2.26 =2.26/(1+10.75%)^2 $1.84
2 Terminal Value (Horizon Value)=D2*(1+g)/r-g =2.26*(1+5%)/(10.75%-5%) $41.23 =41.23/(1+10.75%)^2 $33.62
Stock Price (total of present value) = $37.28
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