Question

# Analysts expect MC, Co. to maintain a dividend payout ratio of 35% and enjoy an expected...

Analysts expect MC, Co. to maintain a dividend payout ratio of 35% and enjoy an expected growth rate of 12% per year for the next 5 years. After the fifth year, all earnings will be paid out as dividends. The required rate of return on MC, Co equity is 8%. Given that the last dividend paid was \$0.5, at what price would the analysts currently value the stock under their own expectations?

Dividend per share = Earnings per share*Dividend Payout
Earnings Per Share = 0.5/35% = 1.42857
Dividend Last Year = 0.5
Dividend Next Year = 0.5*(1+growth) = 0.5*(1+12%) =0.5*1.12
Dividend in  Year 2= 0.5*(1+growth)2 = 0.5*(1+12%)2 =0.5*1.122
Dividend in year 3 = 0.5*(1+growth)3 = 0.5*(1+12%)3 =0.5*1.123
Dividend in year 4 = 0.5*(1+growth)4 = 0.5*(1+12%)4 =0.5*1.124
Dividend in year 5 = 0.5*(1+growth)5 = 0.5*(1+12%)5 =0.5*1.125
Dividen in year 6 = 1.42857
Terminal value = 1.42857 /(8%) = 17.85714

Price of stock = 0.5*1.12/1.08 + 0.5*1.122/1.082 + 0.5*1.123/1.083 + 0.5*1.124/1.084 + 0.5*1.125/1.085 + 17.85714/1.085
=14.95

Please Discuss in case of Doubt

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