Question

City Movers announced its next annual dividend will be $.60 a share. The following dividends will be $.75, and $.95 a share annually for the following two years, respectively. After that, dividends are projected to increase by 4.5 percent per year. How much is one share of this stock worth at a rate of return of 12.5 percent? (Show your formula/ equation/ calculations)

Kindly provide me with the formula/method of getting the answer, thank you!

Answer 1

Share Price = Present Value of dividends and terminal year discounted @ 12.5%

Year	Dividend	Present Value
1	0.60	0.60/(1+0.125)^1 =0.5333
2	0.75	0.75/(1+0.125)^2 = 0.5926
3	0.95	0.95/(1+0.125)^3 = 0.6672
Terminal Value	12.409375	12.409375/(1+0.125)^3 = 8.7155

Terminal Value = D3 * (1+g) / (r-g)

Terminal Value = 0.95 * (1+0.045)/(0.125 - 0.045) = 12.409375

Share Price = 10.51 Answer

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