A company just paid a dividend of D= 2.50 for its stick. Company’s dividend is e

Question

A company just paid a dividend of D= 2.50 for its stick. Company’s dividend is expected to grow by 70% in the first year, by 30% in the second year, by 12% in the third year and at a constant rate of 5% in year 4 and thereafter. The required return in this stock is 20%. What is the sticks current value? A company just paid a dividend of D= 2.50 for its stick. Company’s dividend is expected to grow by 70% in the first year, by 30% in the second year, by 12% in the third year and at a constant rate of 5% in year 4 and thereafter. The required return in this stock is 20%. What is the sticks current value?

Explanation / Answer

Dividend for year 1=(2.5*1.7)=4.25

Dividend for year 2=(4.25*1.3)=5.525

Dividend for year 3=(5.525*1.12)=6.188

Value after year 3=(Dividend for year3*Growth rate)/(Required return-Growth rate)

=(6.188*1.05)/(0.2-0.05)=$43.316

Hence current value=Future dividends*PResent value of discounting factor(20%,time period)

=4.25/1.2+5.525/1.2^2+6.188/1.2^3+43.316/1.2^3

which is equal to

=$36.03(Approx).

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