Question

# Could I Industries just paid a dividend of \$1.32 per share. The dividends are expected to...

Could I Industries just paid a dividend of \$1.32 per share. The dividends are expected to grow at a rate of 17.5 percent for the next five years and then level off to a growth rate of 6 percent indefinitely. If the required return is 14 percent, what is the value of the stock today?

The value 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 + Dividend in year 5 / (1 + required rate of return)5 + 1 / (1 + required rate of return)5 [ ( Dividend in year 5 (1 + growth rate) / ( required rate of return - growth rate) ]

= (\$ 1.32 x 1.175) / 1.14 + (\$ 1.32 x 1.1752) / 1.142 + (\$ 1.32 x 1.1753) / 1.143 + (\$ 1.32 x 1.1754) / 1.144 + (\$ 1.32 x 1.1755) / 1.145 + 1 / 1.145 x [ (\$ 1.32 x 1.1755 x 1.06) / (0.14 - 0.06) ]

= \$ 1.551 / 1.14 + \$ 1.822425 / 1.142 + \$ 2.141349375 / 1.143 + \$ 2.516085516 / 1.144 + \$ 2.956400481 / 1.145 + \$ 39.17230637 / 1.145

= \$ 27.58 Approximately

Feel free to ask in case of any query relating to this question

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