Question

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.50 over the next 3 years, respectively. Afterwards, the dividend is expected to increase by 2.25 percent annually. What is one share of this stock worth to you currently if you require a 10.5 percent rate of return on similar investments?

$48.99

$51.47

$62.92

$74.81

Answer 1

Answer

Last Annual Dividend (Do) = $ 3.60

Dividend at the end of 1 Year (D1) = $ 3.80

Dividend at the end of 2 Year (D2) = $ 4.10

Dividend at the end of 3 Year (D3) = $ 4.50

Now Thereafter the dividend is expected to increase by 2.25% thereafter.

Value of the Firm at the end of Year 3 = [D3 (1+G)/ (Re - G)]

Therefore Re - 10.5 % ( Rate of return on Similar Investment)

G is the growth Rate = 2.25 %

Now, Value of the Share at the end of year 3 = [4.50 (1+0.0225)/(10.5-2.25)%]

Value of the Share at the end of Year 3 = [4.60125/8.25%)

Value of the Share at the end of Year 3 = $ 55.77

Now The value of the share now = D1/ (1.105) + D2 /(1.105)^2 + D3 /(1.105)^3 + Value of Share at Year 3/(1.105)^3

Therefore Current Value of Share = $ 3.80 / (1.105) + $ 4.10 / (1.105)^2 + $ 4.50 / (1.105)^3 + $ 55.77 / (1.105)^3

Therefore Current Value of Share = $ 51.47