14. Hannibal Company\'s dividend is expected to grow at 10% for the next 3 years
ID: 2742538 • Letter: 1
Question
14. Hannibal Company's dividend is expected to grow at 10% for the next 3 years and then at 5% forever. The company has just paid a dividend of $2 and the required rate of return is 15%.
(a) what is the current price of the stock?
Year
Dividend
Growth Rate
Dividend After
0
$2
1
$2 * 1.10
10%
$2.20
2
$2 * 1.10^2
10%
$2.42
3
$2 * 1.10^3
10%
$2.66
4
$2.66 * 1.05
10%
$2.80
Year 4 = $2.80/ (15%-5%) = $27.95
Year
Dividend
PV (15%)
Present Value
1
$2.20
.8696
$1.91
2
$2.42
.7561
$1.83
3
$2.66
.6575
$1.75
Year 4 = $27.95 * .6575 = $18.38
Current Value of Stock = $1.91 + $1.83 + $1.75 + $18.38 = $23.87
(b) what is the expected stock price next year?
Expected Stock Price Next Year
P1 = D2/ r-g
P1 = $2.42/ (.15-.05)
P1 = $48.4
(c) what is the expected stock price 10 years from now?
Expected Stock Price after 10 Years
P10 = D11/ r-g
P10 = $2.8 * (1.05)^7/ (.15-.05)
P10 = $39.33
Can you check my answers?
Year
Dividend
Growth Rate
Dividend After
0
$2
1
$2 * 1.10
10%
$2.20
2
$2 * 1.10^2
10%
$2.42
3
$2 * 1.10^3
10%
$2.66
4
$2.66 * 1.05
10%
$2.80
Explanation / Answer
b)
expected stock price next year = 2.42 * 0.8696 + 2.42 * 0.7561 + 27.95 * 0.7561
= 25.07
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