Question

Company D is expected to pay a $4.44 dividend at the end of the 7th year. You expect Company D's dividend to grow by 1.38% per year forever. Company D's equity cost of capital is 8.47%. What should be the price of the stock today?

Answer 1

Solution:-

The dividend for 7th year is expected to be $4.44 and growth rate is at a constant level of 1.38%. This means, that expected dividend one year from now is as follows:

Expected dividend one year from now= Expected dividend 7th year*[1/(1+1.38%)]⁶ = $4.44*[1/(1+1.38%)]⁶ = $4.09

Using dividend discount model, the expected stock price today is as follows:

Stock price today= Expected dividend one year from/(Cost of capital-growth rate)= $4.09*/(8.47%-1.38%) = $57.69