Question

Philadelphia SteelWorks, Inc has had steady earnings for the last several years and foresees this happening in the near future. The dividends PSW expects to pay in the next 3 years is $3 per share. Starting in year 4, the company expects to increase this dividend to 6% per year indefinitely. What is the stock price if investors require a 10% return?

Answer 1

Terminal value at year 3 =D3(1+g)/(rs-g)

                    = 3(1+ .06)/(.10 -.06)

                     = 3 *1.06 / .04

                     = $ 79.50

Price today : [PVA10%,3*Dividend ]+[PVF10%,3*Terminal value]

       =[2.48685*3]+[.75131*79.50]

         = 7.46+ 59.73

       = $ 67.19 per share

**find present value annuity factor and present value factor using their table respectively.