Question 1 Alphabet Inc. will not pay it\'s first dividend until ten years from

Question

Question 1

Alphabet Inc. will not pay it's first dividend until ten years from now. The first dividend received in 10 years (Year 10) is expected to be $120. Dividends are expected to grow at 4% forever after this first dividend payment. The required rate of return for similar stocks is 15%. What is the current value of Alphabet, Inc. stock?

Question 2

Snoke Inc's will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What will Snoke's dividend be in 100 years? (Year 100)?

Question 3

Snoke Inc's will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What is Snoke's estimated stock price as of today (Year 0 Estimated Price of Stock)?

Explanation / Answer

Answer 1 Value of future dividends at the end of 10th year = Dividend payable in 11th year / [required rate of return - Growth rate] Value of future dividends at the end of 10th year = [$120 * 1.04] / [0.15 - 0.04] Value of future dividends at the end of 10th year = $1134.55 Current value of Alphabet, Inc. stock = Value of future dividends at the end of 10th year * present value factor @ 15% Current value of Alphabet, Inc. stock = $1134.55 * [1/1.15^10] = $280.44 Answer 2 Value of Snoke's dividend be in 100 years = Next Year dividend * (1+growth rate)^no.of years Value of Snoke's dividend be in 100 years = $10 * (1+0.05)^100 = $1315.01 Answer 3 Snoke's estimated stock price as of today = Present value of next year dividend + Present value of future dividends Present value of next year dividend = Next dividend * present value factor @ 10% Present value of next year dividend = $10 * (1/1.10^1) = $9.09 Present value of future dividends at the end of 2nd year = [Next year dividend * (1+growth rate)] / [required rate of return - Growth rate] Present value of future dividends at the end of 2nd year = [$10 * (1+0.05)] / [0.10 - 0.05] = $210 Present value of future dividend = $210 * (1/1.10^2) = $173.55 Snoke's estimated stock price as of today = $9.09 + $173.55 = $182.64

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