Question

# Kohl’s just paid an annual dividend of \$5 a share. Management estimates the dividend will increase...

Kohl’s just paid an annual dividend of \$5 a share. Management estimates the dividend will increase by 5 percent a year for the next three years. After that, the dividend growth rate is estimated at 2 percent. The required rate of return is 10 percent. What is the value of this stock today?

Dividend paid (D0)= \$5

Growth till year end 3 (g) = 5%

Growth from 4th year onwards (g1) = 2%

Dividend at year end 1 (D1) = \$5*1.05 = \$5.25

Dividend at year end 2 (D2)= \$5.25*1.05 = \$5.5125

Dividend at year end 3 (D3)= \$5.5125*1.05 = \$5.7881

Dividend at year end 4 (D4)= \$5.7881*1.02 = \$5.9039

Required rate of return (Re) = 10%

Price at the end of year (P3) = D4/ (Re-g1)
= \$5.9039/ (0.10- 0.02)
= \$5.9039/ 0.08
= \$73.80

Price today (P0) = D1/ (Re-g)
= \$5.25/ (0.10-0.05)
= \$5.25/ 0.05
= \$105

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Need Online Homework Help?

Most questions answered within 1 hours.