Question

Sandhill Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 6 percent. If the required rate of return is 16.00 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Answer 1

The current value of the stock is the present value of all the future expected dividends

First, we calculate the terminal value of the future dividends after year 4

Terminal value at year 4 = Dividend in year 5/(Required rate of return-Growth rate)

Terminal value at year 4 = 3*1.06/(0.16-0.06) = $31.8

Now, we discount all the dividends for 4 years along with the terminal value to the present value using required rate.

Current value of stock = 5/(1.16) + 6.25/(1.16^2) + 4.75/(1.16^3) + ((3+31.8)/(1.16^4))

Current value of stock = $31.22