The stock of northwest saving bank just paid a dividend of $0.52 per share. A) M

Question

The stock of northwest saving bank just paid a dividend of $0.52 per share.

A) Most banks in the region are increasing their dividends at about 5% per year. Assume that Northwest saving bank will increase its dividends at 5% forever. If the required rate of return is 9%, what should be the price of Northwest stock?

B) A closer examination of northwest saving bank indicates that dividends are increasing faster than 5%. You think they will be able grow the current dividend by 10% for 5 years. After that, the dividend is expected to grow at 5% forever. In that case, what should be the price of the stock if the required rate of return is 9%?

Explanation / Answer

Case A: Price = Dividend * ( 1 + Growth rate) / ( Equity Cost - growth rate) = 0.52 * ( 1 + 5%)/ ( 9% - 5%) = 13.65

Case B:

Particulars Amount Disc Factor Present Value D1              0.57 0.9174                     0.52 D2              0.63 0.8417                     0.53 D3              0.69 0.7722                     0.53 D4              0.76 0.7084                     0.54 D5              0.84 0.6499                     0.54 T5           21.98 0.6499                   14.29 Stock Price                   16.96

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