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Northern Co. expects to pay a dividend of $1 per share next year, which will grow...

Northern Co. expects to pay a dividend of $1 per share next year, which will grow at 10% for the following 5 years. Afterwards, the growth becomes 2%. The cost of capital for Northern Co. is 8%. What is today's share price of Northern Co.?

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Answer #1

Short term growth rate(gs) = 10%

Long term growth rate(gL) = 2%

D1 = $1

D2 = D1*(1+gs) = $1*(1+0.10) = $1.10

D3 = D2*(1+gs) = $1.10*(1+0.10) = $1.21

D4 = D3*(1+gs) = $1.21*(1+0.10) = $1.331

D5 = D4*(1+gs) = $1.331*(1+0.10) = $1.4641

D6 = D5*(1+gL) = $1.4641*(1+0.02) = $1.493382

Stock price at the end of 5 years = D6/(r-gL)

Where, r is the required return

Stock price at the end of 5 years(P5) = $1.493382/(0.08-0.02)

= $24.8897

Today's share price =

Share price =

Share price = 0.92593 + 0.94307 + 0.96054 + 0.97832 + (0.99644186 + 16.9395

= 21.74

Therefore, today's share price = $21.74

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