You are interested in purchasing enough number of shares in Pepsi so that you ca

Question

You are interested in purchasing enough number of shares in Pepsi so that you can be guaranteed a seat in the Board of Directors when the next annual shareholder’s meeting is held. Currently Pepsi has 10,000 shares outstanding. The corporation has not paid any dividends last year, but is expected to pay an annual dividend of $2.00/share at the end of year 2. During years 3-6 the company is expected to grow its dividends by 15% a year. Starting year 7, the company is expected to pay dividends that are growing only 4% a year from then on. MUST SHOW WORK AND FORMULAS USED.

1.Calculate the dividends the company will pay during years 2, 3, 4, 5, 6, 7.

2.Assuming the required rate of return of 12% APR, calculate the value of one share of stock at the end of year 6 using the dividend growth model.

3.Assuming the required rate of return of 12% APR, calculate the value of one share of stock as of TODAY (YEAR 0).

Explanation / Answer

Answer:1

D2=$2.00/Share

D3=$2*(1+0.15)=2.3

D4=2.3*(1+0.15)=2.645

D5=2.645*(1+0.15)=3.04175

D6=3.04175*(1+0.15)=3.4980125

D7=3.4980125*(1+0.04)=3.637933

Answer:2 P=D7/r-g

=3.637933/(0.12-0.04)=$45.47

Answer:3 P0=31.44695

Year Dividend Price Total cash flow P.V.f (12%) PV 1 0 0.8928 0 2 2 2 0.79719 1.59438 3 2.3 2.3 0.71178 1.637094 4 2.645 2.645 0.63551 1.680924 5 3.04175 3.04175 0.5674 1.725889 6 3.498013 45.47 48.96801 0.50663 24.80866 31.44695

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