Question

Could I Industries just paid a dividend of $1.30 per share. The dividends are expected to grow at a rate of 15 percent for the next five years and then level off to a growth rate of 6 percent indefinitely. If the required return is 12 percent, what is the value of the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price:

Answer 1

Year 1 dividend = 1.3 * (1 + 15%) = 1.495

Year 2 dividend = 1.495 * (1 + 15%) = 1.71925

Year 3 dividend = 1.71925 * (1 + 15%) = 1.977138

Year 4 dividend = 1.977138 * (1 + 15%) = 2.273708

Year 5 dividend = 2.273708 * (1 + 15%) = 2.614764

Year 6 dividend = 2.614764 * (1 + 6%) = 2.77165

Value at year 5 = D6 / (Required rate - growth rate)

Value at year 5 = 2.77165 / (0.12 - 0.06)

Value at year 5 = 46.194167

Value of stock today = 1.495 / (1 + 0.12)¹ + 1.71925 / (1 + 0.12)² + 1.977138 / (1 + 0.12)³ + 2.273708 / (1 + 0.12)⁴ + 2.614764 / (1 + 0.12)⁵ + 46.194167 / (1 + 0.12)⁵

Value of stock today = $33.25