Question

Upton Corporation is expected to pay the following dividends over the next four years: $14, $10, $9, and $4.50. Afterwards, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 10 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The current value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4/ (1 + required rate of return)⁴ + 1 / (1 + required rate of return)⁴[ ( Dividend in year 4 (1 + growth rate) / ( required rate of return - growth rate) ]

= $ 14 / 1.10 + $ 10 / 1.10² + $ 9 / 1.10³ + $ 4.50 / 1.10⁴ + 1 / 1.10⁴ x [ ( $ 4.50 x 1.04) / (0.10 - 0.04) ]

= $ 14 / 1.10 + $ 10 / 1.10² + $ 9 / 1.10³ + $ 4.50 / 1.10⁴ + $ 78 / 1.10⁴

= $ 14 / 1.10 + $ 10 / 1.10² + $ 9 / 1.10³ + $ 82.50 / 1.10⁴

= $ 84.10 Approximately

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