Question

Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 3% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s most recent dividend, D0, was $1.37, and its required rate of return is 11%. What is the expected Horizon Value at t=4?

And

And Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 3% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s most recent dividend, D0, was $1.37, and its required rate of return is 11%. What is the current price of the common stock? Thank you

Answer 1

a). D1 = D0 * (1 + g) = $1.37 * (1 + 0.03) = $1.41

D2 = D1 * (1 + g) = $1.41 * (1 + 0.03) = $1.45

D3 = D2 * (1 + g) = $1.45 * (1 + 0.03) = $1.50

D4 = D3 * (1 + g) = $1.50 * (1 + 0.03) = $1.54

D5 = D4 = $1.54

P4 = D5/[r - gC] = $1.54/[0.11-0.00] = $1.54/0.11 = $14.02

b). P0 = [D1/(1+r)] + [D2/(1+r)²] + [D3/(1+r)³] + [(D4+P4)/(1+r)⁴]

= [$1.41/(1+0.11)] + [$1.45/(1+0.11)²] + [$1.50/(1+0.11)³] + [($1.54+$14.02)/(1+0.11)⁴]

= $1.27 + $1.18 + $1.09 + $10.25 = $13.80