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)**

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