Question

a new firm is rapidly growing industry. The company is planning on increasing its annual dividend by 17% a year for the next five years and then decreasing the growth rate to 5.4% per year. The company just paid its annual dividend in the amount of $1.36 per share. What is the current value of one share if the required rate of return is 14.2%?

A.

$28.92

B.

$28.59

C.

$28.13

D.

$25.70

E.

$25.26

Answer 1

D1=(1.36*1.17)=1.5912

D2=(1.5912*1.17)=1.861704

D3=(1.861704*1.17)=2.17819368

D4=(2.17819368*1.17)=2.548486606

D5=(2.548486606*1.17)=2.981729329

Value after year 5=(D5*Growth Rate)/(Required rate-Growth Rate)

=(2.981729329*1.054)/(0.142-0.054)

=$35.71298537

Hence current value=Future dividends and value*Present value of discounting factor(rate%,time period)

=1.5912/1.142+1.861704/1.142^2+2.17819368/1.142^3+2.548486606/1.142^4+2.981729329/1.142^5+$35.71298537/1.142^5

=$25.70(Approx).