Question

If 1) the expected return for XYZ stock is 9.5 percent; 2) the dividend is expected to be $4.38 in one year, $6.33 in two years, $0 in three years, and $2.54 in four years; and 3) after the dividend is paid in four years, the dividend is expected to begin growing by 4.5 percent a year forever, then what is the current price of one share of the stock?

Answer #1

**The current value of the stock is computed as shown
below:**

**= Dividend in year 1 / (1 + required rate of
return)**^{1}**+ Dividend in
year 2 / (1 + required rate of
return)**^{2}**+ Dividend in
year 3 / (1 + required rate of
return)**^{3}**+ Dividend in
year 4/ (1 + required rate of
return)**^{4}**+ 1 / (1 +
required rate of
return)**^{4}**[ ( Dividend
in year 4 (1 + growth rate) / ( required rate of return - growth
rate) ]**

= $ 4.38 / 1.095 + $ 6.33 / 1.095^{2} + $ 0 /
1.095^{3} + $ 2.54 / 1.0954^{4} + 1 /
1.0954^{4} x [ ($ 2.54 x 1.045) / (0.095 - 0.045) ]

= $ 4.38 / 1.095 + $ 6.33 / 1.095^{2} + $ 0 /
1.095^{3} + $ 2.54 / 1.0954^{4} + $ 53.086 /
1.0954^{4}

**= $ 47.97**

**Feel free to ask in case of any query relating to this
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