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Nachman Industries just paid a dividend of D0 = $2.50. Analysts expect the company's dividend to...

Nachman Industries just paid a dividend of D0 = $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.

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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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