Question

Nachman Industries just paid a dividend of D_{0} =
$2.50. Analysts expect the company's dividend to grow by 30% this
year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and
thereafter. The required return on this low-risk stock is 9.00%.
What is the best estimate of the stock’s current market value? Do
not round intermediate calculations.

Please show work

Answer #1

D0 = 2.5

D1 = 2.5 * 1.3 = 3.25

D2 = 3.25 * 1.1 = 3.575

D3 = 3.575 * 1.05 = 3.75375

Present Value of all the dividend from year 3 onwards at Year 2 (P2) = D3 / Ke - g

PV at Year 2 (P2) = 3.75375 / 0.09 - 0.05

PV at Year 2 (P2) = 93.84375

Year | Particulars | Cash Flow | Present Value factor @9% | Present Value |

1 | Dividend | 3.25 | 0.917 | 2.98 |

2 | Dividend | 3.58 | 0.842 | 3.01 |

2 | P2 | 93.84 | 0.842 | 78.99 |

Current Market Price | 84.98 |

Current Market price of the stock = 84.98

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