Question

Martin Office Supplies paid a $3 dividend last year. The dividend is expected to grow at...

Martin Office Supplies paid a $3 dividend last year. The dividend is expected to grow at a constant rate of 5 percent over the next four years. The required rate of return is 14 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Compute the anticipated value of the dividends for the next four years. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Anticipated Value
D1 ?
D2 ?
D3 ?
D4 ?

b. Calculate the present value of each of the anticipated dividends at a discount rate of 14 percent. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

PV of Dividends
D1 ?
D2 ?
D3 ?
D4 ?
Total $ ?

c. Compute the price of the stock at the end of the fourth year (P4). (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Stock price at Year 4 ?
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Homework Answers

Answer #1

Answer a.

Last Dividend, D0 = $3.00
Growth Rate, g = 5%

D1 = $3.00 * 1.05 = $3.15
D2 = $3.15 * 1.05 = $3.31
D3 = $3.31 * 1.05 = $3.48
D4 = $3.48 * 1.05 = $3.65

Answer b.

Discount Rate, ke = 14%

Present Value of D1 = $3.15 / 1.14
Present Value of D1 = $2.76

Present Value of D2 = $3.31 / 1.14^2
Present Value of D2 = $2.55

Present Value of D3 = $3.48 / 1.14^3
Present Value of D3 = $2.35

Present Value of D4 = $3.65 / 1.14^4
Present Value of D4 = $2.16

Total Present Value of Dividends = $2.76 + $2.55 + $2.35 + $2.16
Total Present Value of Dividends = $9.82

Answer c.

D5 = D4 * 1.05
D5 = $3.65 * 1.05
D5 = $3.83

Stock Price at Year 4, P4 = D5 / (ke - g)
Stock Price at Year 4, P4 = $3.83 / (0.14 - 0.05)
Stock Price at Year 4, P4 = $42.56

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