An analyst has made the following estimate of Koch Industries. After 5 years, di

Question

An analyst has made the following estimate of Koch Industries. After 5 years, dividends are expected to quit growing and pay a constant dividend of $1.50. If the required rate of return is 10%, what is the stock’s price at P0?

1                        2                      3                       4                       5

   |--------------------|--------------------|--------------------|--------------------|

1.00                   1.05                 1.22                  1.37                  1.50

Explanation / Answer

Ans

Year Dividend Discount Factor Discounted Value 1 1 0.909090909 0.909090909 2 1.05 0.826446281 0.867768595 3 1.22 0.751314801 0.916604057 4 1.37 0.683013455 0.935728434 5 1.5 0.620921323 0.931381985 4.56057398 Terminal Cash flow Dividend at year 5/Required rate of return 1.5/.10 15 Total Cash inflow till year 5                                  4.56 Terminal Cash flow 15 Total discounted cash flow being the Market price of share at Year 0                                19.56

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