Question

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?

Answer 1

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

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