Question

*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?

Answer #1

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*1.12^{2}

Dividend in year 3 = 0.5*(1+growth)^{3} =
0.5*(1+12%)^{3} =0.5*1.12^{3}

Dividend in year 4 = 0.5*(1+growth)^{4} =
0.5*(1+12%)^{4} =0.5*1.12^{4}

Dividend in year 5 = 0.5*(1+growth)^{5} =
0.5*(1+12%)^{5} =0.5*1.12^{5}

Dividen in year 6 = 1.42857

Terminal value = 1.42857 /(8%) = 17.85714

Price of stock = 0.5*1.12/1.08 +
0.5*1.12^{2}/1.08^{2} +
0.5*1.12^{3}/1.08^{3} +
0.5*1.12^{4}/1.08^{4} +
0.5*1.12^{5}/1.08^{5} +
17.85714/1.08^{5}

=14.95

Please Discuss in case of Doubt

Best of Luck. God Bless

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