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 / 1.095² + $ 0 / 1.095³ + $ 2.54 / 1.0954⁴ + 1 / 1.0954⁴ x [ ($ 2.54 x 1.045) / (0.095 - 0.045) ]

= $ 4.38 / 1.095 + $ 6.33 / 1.095² + $ 0 / 1.095³ + $ 2.54 / 1.0954⁴ + $ 53.086 / 1.0954⁴

= $ 47.97

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