Question

Suppose a stock will pay $12 per share dividend in one year's time. The dividend is...

Suppose a stock will pay $12 per share dividend in one year's time. The dividend is projected to grow at 8% the following year, and then 4% per year indefinitely after that.

To clarify, dividend at beginning of year 1 (that is, one year from today) is:

$12

Beginning of year 2 (2 years from today) is:

$12 * 1.08

Beginning of year 3 (3 years from today) is:

$12 * 1.08 * 1.04

and a 4% rate of growth every year after that.

The required return is 8%. What is the stock’s price today?

Homework Answers

Answer #1
Required rate 8.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 0% 12 12 1.08 11.1111
2 12 8% 12.96 336.96 349.92 1.166 300.10292
Long term growth rate = 4% Value of Stock = Sum of discounted value = 311.21
Where
Discount factor= (1+ required rate)^N
Discounted value= total value/discount factor
Total value = Dividend + terminal value
Horizon value = year 2 Dividend *(1+long term gro wth rate)/( required rate-long term growth rate)
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