Question

The Mintcoin Inc has just paid an annual dividend of 40 cents per share. You forecast...

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.

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Answer #1

D0 = $0.40 per share

D1 = D0 * 1.25 = $0.5

D2 = D1 * 1.25 = $0.625

D3 = D2 * 1.25 = $0.78125

D4 = D3 * 1.25 = $0.9765625

D5 = D4 * 1.08 = $1.0546875

Terminal Value of Dividends from Year 5 onwards = D5/(0.12 - 0.08) = $26.3671875

Price = PV(D1) + PV(D2) + PV(D3) + PV(D4) + 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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