Question

American Express trades on the New York Stock Exchange under the ticker symbol AXP. In 2016, AXP was paying a dividend of $.80 and analysts forecasted five-year growth rates of 10.54% for AXP and 13.21% for the financial services industry. Assume the growth rate for the financial services industry will remain constant. Then, assuming AXP's growth rate will revert to the industry average after five years, what value would we place on AXP, if we use a discount rate of 15%?

Work on the example and select from the following options to see if you answer it correctly.

1. $35.77

2. $45.08

3. $48.21

4. $50.60

Answer 1

Dividend currently paying = $ 0.80

Growth rate upto 5 years = 10.54%

So Expected dividend will calculate for 1st year = $0.80*1.1054 - $0.88

And for next five year so on

Year	Dividend amount	Present Value @ 15%
0	0.8
1	0.88	0.77
2	0.98	0.74
3	1.08	0.71
4	1.19	0.68
5	1.32	0.66

Growth rate = 13.21% from 6th year and onwards

Expected dividend for 6th year = $1.32*1.1321 = $1.49

Value of the AXP at 5th year with constant growth @ 13.21%= $1.49/(0.15-0.1321)

= $83.51

Value of the AXP currently = P.V. of dividend payable in first 5 years + Present Value at 5th year @ 15%

= $0.77+$0.74+$0.71+$0.68+$0.66+$83.51*0.4971

= $45.08

So the option (2) $45.08 is the correct option.