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*1.12²
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

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