Question

# Coca Cola presently pays no dividend. You anticipate Coca Cola will pay an annual dividend of...

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:

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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