Question

Coca Cola presently pays no dividend. You anticipate Coca Cola will pay an annual dividend of $0.89 per share five years from today and you expect dividends to grow by 3% per year thereafter. If Coca Cola's equity cost of capital is 10%, then the value of a share of Coca Cola today is:

Answer 1

Answer:

Present Value of dividends = 0.89 * PVAF(10%, 5)
Present Value of dividends = 0.89 * 3.7907 = $3.3737...........Step 1

Now, dividend for 6th year = 0.89 * 1.03 = $0.9167

Now, value of the share on 5th year= D6 / (Ke-g) = 0.9167 / (0.10 - 0.03) = $13.10
This value today = 13.10 / (1.10)^5 = $8.134............Step 2

Now, total value of the share today = Step 1 + Step 2
total value of the share today = $ (3.3737 + 8.134) = $11.5077

(Values may slightly differ due to rounding off)