Question

Muray Corp. is expected to pay the following dividends over the next 4 years: $14, $7, $10, $2. Afterwards, the company will maintain a constant 6% growth rate in dividends. The required return on stock is 10%.

a)     What is the current price?

b)     What is the price at t =1?

c)       What is the price at t = 18

Please type the answer. not excel or photo. thank you

Answer 1

(a) Expected Dividends over the next 4 years: D1 = $ 14, D2 = $ 7, D3 = $ 10 and D4 = $ 2

Growth Rate post Year 4 = 6 % = g

D5 = D4 x (1+g) = 2 x 1.06 = $ 2.12

Required Rate of Return = r = 10 %

Terminal Value of Perpetual Constant Growth Dividends = P5 = D5 / (r-g) = 2.12 / (0.1-0.06) = $ 53

PV of P5 = 53/(1.1)^(4) = $ 36.19

Total PV of Dividends between Year 1 and Year 4 = 14/(1.1) + 7 / (1.1)^(2) + 10 / (1.1)^(3) + 2/(1.1)^(4) = $ 27.39

Current Price = 27.39 + 36.19 = $ 63.59

(b) Price at the end of Year 1 (t=1) = P1 = D2/(1.1) + D3 / (1.1)^(2) + D4 / (1.1)^(3) + P5 / (1.1)^(3) = 7/(1.1) + 10/(1.1)^(2) + 2/(1.1)^(3) + 53/(1.1)^(3) = $ 55.95

(c) Price at the end of Year 2 = D3/(1.1) + D4 / (1.1)^(2) + P5 / (1.1)^(2) = 10/(1.1) + 2/ (1.1)^(2) + 53/(1.1)^(2) = $ 54.54