Question

1. Gurkarant is planning on paying annual dividends of $1.20, $1.35, and $1.50 over the next 3 years, respectively. After that, Gurkarant's plans to pay a constant dividend of $1.75 per share each year. To compute the value of Gurkarant’s's stock today, you should first determine the value of the stock at the end of year. Calculate the value of the stock. (WITH ALL THE STEPS AND FORMULAS)

You can assume the rate of return by yourself like ( 10% or 20%)

This is the only information I do have......

Answer 1

Current price per share (using dividend discount model) = sum of present values of all future dividends

Since growth rate = 0 after Year 3, the terminal value (TV) at the end of Year 3 becomes

D4/r where D4 = dividend in Year 4 = 1,75; r = rate of return = 10% (assumed as mentioned in the question)

TV = 1.75/10% = 17.50

Current price per share = D1/(1+r) + D2/(1+r)^2 + (D3+TV)/(1+r)^3 where

D1 (Year 1 dividend) = 1.20; D2 (Year 2 dividend) = 1.35; D3 (Year 3 dividend) = 1.50; r = 10%; TV = 17.50

Current price per share = 1.20/(1+10%) + 1.35/(1+10%)^2 + (1.50+17.50)/(1+10%)^3 = $16.48 per share (Answer)