Suppose you know that a company’s stock currently sells for $65.30 per share and

Question

Suppose you know that a company’s stock currently sells for $65.30 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. Required: If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Apocalyptica Corporation is expected to pay the following dividends over the next four years: $6.20, $17.20, $22.20, and $4.00. Afterwards, the company pledges to maintain a constant 5.50 percent growth rate in dividends, forever. Required: If the required return on the stock is 9 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

1)

Price = recent dividend* ( 1 + growth rate )/( required rate of return - growth rate)

65.3= dividend * (1 + .045)/(0.090 - 0.045)

dividend = $2.81

2)

required return = 9% Year Previous year dividend Dividend growth rate Dividend current year Terminal value Total Value Discount factor Discounted value 1 0 0% 6.2 6.2 1.09 5.688073 2 6.2 0% 17.2 17.2 1.1881 14.4769 3 17.2 0% 22.2 22.2 1.295029 17.14247 4 22.2 0% 4 120.5714 124.5714286 1.41158161 88.24954 5 4 5.50% 4.22 Value of stock = Sum of discounted value= 125.557

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