Question

Tan Rocks, an outdoor theater, has suspended their dividend to conserve capital for the rest of their fiscal year (May 1 to May 1) since they do not anticipate being open this summer. Management is assuming the Covid19 effects will continue for each of the next two seasons as well before returning to normal. As such they estimate next year’s dividend to be $1 per share (2021) and it will increase to $1.50 a share the following year (2022). The dividend will return to $2.50 a share in 2023. If the dividend’s historical growth of 3 percent a year returns to normal after 2023 and the required rate of return on the stock of Tan Rocks is 10 percent, what should be their current stock value be based on these assumptions and projections?

Answer 1

1	2	3
Year	Dividend	PVF@ 10%	PV P1 (2*3)
1	1.00	0.9091	0.9090909
2	1.50	0.8264	1.2396694
3	2.50	0.7513	1.878287
3	36.785	0.7513	27.636571
Total	31.663618

price at year 3   =	Diidend 3 * (1+G)/ (Ke-G)
		2.5*1.03/ ( 0.10-0.03)
		36.78571429

Current stock value = 31.66

Note : PV @ 10% = 1/1.10^n where n is equal to years that is 1,2,3