Nerus\' Catering is growing at a very fast rate. As a result, the company expect

Question

Nerus' Catering is growing at a very fast rate. As a result, the company expects to increase its dividend to $0.42, $0.92, and $1.32 over the next three years, respectively. After that, the dividend is projected to increase by 6.5 percent annually. The last annual dividend the firm paid was $0.24 a share. What is the current value of this stock if the required return is 10.3 percent?

The common stock of Major Carter Naquadah Generators is valued at $8 a share. The company increases its dividend by 3.6 percent annually and has just paid a dividend of $0.73 per share. What is the required rate of return (in percents) on this stock?

Explanation / Answer

Q1) Current value of stock $      29.69 Working: a. Present Value of next three year's dividend Year Dividend Discount factor Present Value a b c=1.103^-1 d=b*c 1 $       0.42          0.907 $       0.38 2 $       0.92          0.822 $       0.76 3 $       1.32          0.745 $       0.98 Total $      2.12 b. Terminal value of dividend Terminal value = D3*(1+g)/(Ke-g) Where, = 1.32*(1+0.065)/(0.103-0.065) D3 $       1.32 = $    36.99 g 6.5% Ke 10.3% c. Present Value of terminal value = $    36.99 x         0.745 = $    27.57 d. Present Value of all future dividend = $       2.12 + $    27.57 = $    29.69 As per dividend discount model, Current value of this stock is the present value of all dividend from stock during their lifetime. So, Current value of stock is $      29.69 Q2) Required rate of return 13.05% Working: As per Capital Asset Pricing model, Required rate of return = (D0*(1+g)/P0)+g Where, = (0.73*(1+0.036)/8)+0.036 D0 $       0.73 = 13.05% g 3.60% P0 $             8

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