STOCK VALUATION (2) Constant Growth Model Data of Dividend are given below 2016-
ID: 1170818 • Letter: S
Question
STOCK VALUATION (2) Constant Growth Model Data of Dividend are given below 2016-$1.5 2015-$13 2014-$1.1 2013-$1O Calculate the annual growth rate and determine the value of the stock for 2017 if th required rate of return is 15% Variable Growth Madel Vis considering to purchase a common stock of Warrant Company The recent dividend payment in 2015 was $ 1.5/sh.V estimates that dividend will increaa 10% per annum over the next 3 years: 2016, 2017, 2018 and expects to slow down after 2013 with growth rate estimated at 5 % to forseeable future, if required rate of return is 15%, calculate the value of the stockExplanation / Answer
Answer to Question 1:
Dividend 2013 = $1.0
Dividend 2016 = $1.5
Annual Growth Rate, g = (Dividend 2016 / Dividend 2013)^(1/3) - 1
Annual Growth Rate, g = ($1.5 / $1.0)^(1/3) - 1
Annual Growth Rate, g = 1.5^(1/3) - 1
Annual Growth Rate, g = 1.1447 - 1
Annual Growth Rate, g = 0.1447 or 14.47%
Dividend 2018 = Dividend 2016 * (1 + g)^2
Dividend 2018 = $1.5 * 1.1447^2
Dividend 2018 = $1.9655
Required Rate of Return, r = 16%
Value of Stock, 2017 = Dividend 2018 / (r - g)
Value of Stock, 2017 = $1.9655 / (0.16 - 0.1447)
Value of Stock, 2017 = $128.46
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