Question

ABC Company's last dividend was $3.5. The dividend growth rate is expected to be constant at 6% for 4 years, after which dividends are expected to grow at a rate of 4% forever. The firm's required return (rs) is 9%. What is its current stock price (i.e. solve for Po)?

Answer #1

Required rate= | 9.00% | ||||||

Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |

1 | 3.5 | 6.00% | 3.71 | 3.71 | 1.09 | 3.4037 | |

2 | 3.71 | 6.00% | 3.9326 | 3.9326 | 1.1881 | 3.30999 | |

3 | 3.9326 | 6.00% | 4.168556 | 4.168556 | 1.295029 | 3.21889 | |

4 | 4.168556 | 6.00% | 4.41866936 | 91.908 | 96.32666936 | 1.41158161 | 68.24024 |

Long term growth rate (given)= | 4.00% | Value of Stock = | Sum of discounted value = |
78.17 |

Where | |||

Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||

Total value = Dividend + horizon value (only for last year) | |||

Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate) | |||

Discount factor=(1+ Required rate)^corresponding period | |||

Discounted value=total value/discount factor |

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