Question

1. Murray Telecom just paid a $3.50 per share stock dividend (D₀). Dividends are expected to grow at a rate of 8 percent per year for the next 6 years, 4 percent per year for the subsequent 4 years, and then level off into perpetuity at a growth rate of 2 percent per year. Using the dividend growth model, what should be the value of the firm’s common stock if the required rate of return on similar securities is 11.25 percent?

Answer 1

D0 = 3.50

D1 = 3.50( 1+ 0.08) = 3.78

D2 = 3.78( 1+ 0.08) = 4.0824

D3 = 4.0824( 1+ 0.08) = 4.408992

D4 = 4.408992( 1+ 0.08) = 4.76171136

D5 = 4.76171136( 1+ 0.08) = 5.1426482688

D6 = 5.1426482688( 1+ 0.08) = 5.5540601303

D7 = 5.5540601303( 1+ 0.04) = 5.77622253551

D8 = 5.77622253551( 1+ 0.04) = 6.00727143693

D9 = 6.00727143693( 1+ 0.04) = 6.2475622944

D10 = 6.2475622944( 1+ 0.04) = 6.49746478617

Value of Stock =

where r = 0.1125

G = 0.02

=

= $53.56