Question

XYZ company is expected to pay a dividend per share of $1.1 for the coming year....

XYZ company is expected to pay a dividend per share of $1.1 for the coming year. It expected that company can maintain a dividend growth of 15% a year for the next 3 years. Given an in-depth analysis, it comes to term that the growth rate will decline to 5 per cent per annum and remains at that level indefinitely. The required rate of return on the shares is 12 per cent per annum.

  1. Calculate the current share price.
  2. If the market for the company is $20.00, will you recommend to buy this stock?
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Answer #1

i. The current share price = $21.3417

It is equal to the present value of future dividends.

Dividend discount model

ii. Yes, we would recommend to buy this stock at a market price of $20 because the value of each share is $21.3417

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