Question

Wyatt Oil presently pays no dividend. You anticipate Wyatt Oil will pay an annual dividend of...

Wyatt Oil presently pays no dividend. You anticipate Wyatt Oil will pay an annual dividend of $0.74 per share two years from today and you expect dividends to grow by 5.36% per year thereafter. If Wyatt Oil's equity cost of capital is 14.64%, then the value of a share of Wyatt Oil today is:

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Answer #1

Present Value of Dividend = Amount of Dividend in Year 2 * Present Value of Discounting factor(rate, time)

= $0.74*1/(1.1464)^2

= $ 0.5630660792437

Price at Year 2 = Expected Dividend in Year 3/ ( Required Return - Growth rate)

= [0.74* (1+5.36%)]/(14.64%-5.36%)

=$ 8.40155172413793

Present Value of Price at Year 2 = Price at Year 2 * Present Value of Discounting factor(rate, time)

= 8.40155172413793*1/(1.1464)^2

= $ 6.392741606585

Value of Share today = Present Value of Price at Year 2 + Present Value of Dividend

= 0.5630660792437 +6.392741606585

= $ 6.96

Answer = $ 6.96

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