Question

Phantom plans to pay annual dividends of $0.45, $0.60, and $0.75 a share in next three years, respectively. Afterwards, dividends are projected to increase by 1.5 percent per year. What is the market price of the stock today at a required return of 12.5 percent?

Answer 1

The value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + 1 / (1 + required rate of return)³ [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

= $ 0.45 / 1.125 + $ 0.60 / 1.125² + $ 0.75 / 1.125³ + 1 / 1.125³ x [ ($ 0.75 x 1.015) / (0.125 - 0.015) ]

= $ 0.45 / 1.125 + $ 0.60 / 1.125² + $ 0.75 / 1.125³ + $ 6.920454545 / 1.125³

= $ 0.45 / 1.125 + $ 0.60 / 1.125² + $ 7.670454545 / 1.125³

= $ 6.26 Approximately

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