Question

You are valuing a share of DUMBA's common stock. It is not currently paying dividends, but you think it will pay a dividend of $.50 4 years from today, $.50 5 years from today, and $.70 6 years from today. After Year 6, dividends will grow at 2% per year forever. If you want a 15% return, how much will you pay today for a share?

Answer 1

The amount is computed as shown below:

= Dividend in year 4 / (1 + required return)⁴ + Dividend in year 5 / (1 + required return)⁵ + Dividend in year 6 / (1 + required return)⁶ + 1 / (1 + required return)⁶ [ (Dividend in year 6 (1 + growth rate) / ( required return - growth rate) ]

= $ 0.50 / 1.15⁴ + $ 0.50 / 1.15⁵ + $ 0.70 / 1.15⁶ + 1 / 1.15⁶ [ ($ 0.70 x 1.02) / (0.15 - 0.02) ]

= $ 0.50 / 1.15⁴ + $ 0.50 / 1.15⁵ + $ 0.70 / 1.15⁶ + $ 5.492307692 / 1.15⁶

= $ 3.21 Approximately