Question

The Mintcoin Inc has just paid an annual dividend of 40 cents per share. You forecast that dividends of Mintcoin Inc will grow at the rate of 25% a year over the next four-year period. From year five on, you expect the subsequent growth rate of dividends to decrease to 8%, the industry average

Construct the time line, showing dividends of the company.

If the required rate of return for the stock is 12%, calculate its price.

Answer #1

D_{0} = $0.40 per share

D_{1} = D_{0} * 1.25 = $0.5

D_{2} = D_{1} * 1.25 = $0.625

D_{3} = D_{2} * 1.25 = $0.78125

D_{4} = D_{3} * 1.25 = $0.9765625

D_{5} = D_{4} * 1.08 = $1.0546875

Terminal Value of Dividends from Year 5 onwards =
D_{5}/(0.12 - 0.08) = $26.3671875

Price = PV(D_{1}) + PV(D_{2}) +
PV(D_{3}) + PV(D_{4}) + PV(TV)

= 0.5/(1.12) + 0.625/(1.12)^{2} +
0.78125/(1.12)^{3} + 0.9765625/(1.12)^{4} +
26.3671875/(1.12)^{4} = **$18.88**

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