Question

Your company paid an annual dividend of $0.92. The street is predicting an 11.2% per year growth rate in earnings over the next five years. After​ that, your companies earnings are expected to grow at the current industry average of 5.4% per year. If​ the equity cost of capital is 9.1% per year and its dividend payout ratio remains​ constant, for what price does the DDM predict your company's stock should​ sell?

1. The value of​ your companies stock is $____________

Answer 1

Annual dividend just paid (D0) = $0.92

D_n = D_(n-1) * (1 + g)

D1 = $0.92 * 1.112 = $1.02304

D2 = $1,02304 * 1.112 = $1.13762

D3 = $1.13762 * 1.112 = $1.265034

D4 = $1.265034 * 1.112 = $1.406718

D5 = $1.406718 * 1.112 = $1.56427

Terminal value at end of 5 years = $1.56427 * 1.054 / (0.091 - 0.054) = $44.5606

Present value of all the above cash flows =

[$1.02304 / (1.091)¹] + [$1.13762 / (1.091)²] + [$1.265034 / (1.091)³] + [$1.406718 / (1.091)⁴] + [$1.56427 / (1.091)⁵] + [$44.5606 / (1.091)⁵]

= $33.70

So, Value of the companies stock is $33.70