The Bell Weather Co. is a new firm in a rapidly growing industry. The company is
ID: 2749159 • Letter: T
Question
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 21 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $2.80 per share. What is the current value of one share of this stock if the required rate of return is 8.30 percent?
$190.97
$153.71
$156.51
$138.82
$193.77
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 21 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $2.80 per share. What is the current value of one share of this stock if the required rate of return is 8.30 percent?
Explanation / Answer
Using the Dividend Discount Model
Price of share = D1/(1 + ke)1 + D2/(1 + ke)2 + D3/(1 + ke)3 + [D4/(ke -g)]/(1 + ke)3
where ke us the required rate of return = 8.3%
g is the constant growth rate = 5%
D1 = 2.8 * (1 + 21%) = 3.39
D2 = 2.8 * (1 + 21%)2 = 4.10
D3 = 2.8 * (1 + 21%)3 = 4.96
D4 = 2.8 * (1 + 21%)4 = 6.00
Price of share = 3.39/(1 + 8.3%)1 + 4.10/(1 + 8.3%)2 + 4.96/(1 + 8.3%)3 + [6/(8.3% -5%)]/(1 + 8.3%)3
= 3.13 + 3.50 + 3.91 + 143.19 = $153.71
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