Question

SOS Inc. has just paid a dividend of $3.4 and is considering the following dividend policies:...

SOS Inc. has just paid a dividend of $3.4 and is considering the following dividend policies:

Increase dividends by 7% in year one and by 5.2% in year two. After that, dividends will decrease at a rate of 4.6% per year indefinitely.

The required return on the equity of SOS is 8.7%. Calculate the currentstock price of SOS under,

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Answer #1

The current stock price will be derived by making the sum of present value of the future dividends

current dividend = 3.4

dividend for year 1 = 3.4+7%= 3.638

dividend for year 2 = 3.638+5.2%=3.827

and from year 3 the dividend will get reduced by 4.6% indefinitely, the terminal value for the dividends= (3.827-4.6%)/(0.087+0.046)= 27.450

The present values of the above will be= (3.638/1.087)+(3.827/1.087*1.087)+(27.450/1.087*1.087)= 29.81

The value of the stock SOS Inc = 29.81

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