1. RRR Co. just paid a dividend of $1.15 per share. The dividend
is expected to...
Free
90.2K
Verified Solution
Link Copied!
Question
Finance
1. RRR Co. just paid a dividend of $1.15 per share. The dividendis expected to grow by 40% next year, 20% in both Years 2 & 3,10% in Year 4, and then grow at a constant rate of 4% thereafter.The required rate of return is 8.5%. Compute the selling price ofthe stock.
Answer & Explanation
Solved by verified expert
4.2 Ratings (919 Votes)
As per dividend discount model, current price of stock is the
present value of future dividends.
Step-1:Present value of dividends of next 4 years
Year
Dividend
Discount factor
Present
value
a
b
c=1.085^-a
d=b*c
1
$Â Â Â Â Â Â 1.61
0.921659
$Â Â Â Â Â Â 1.48
2
$Â Â Â Â Â Â 1.93
0.849455
$Â Â Â Â Â Â 1.64
3
$Â Â Â Â Â Â 2.32
0.782908
$Â Â Â Â Â Â 1.82
4
$Â Â Â Â Â Â 2.55
0.721574
$Â Â Â Â Â Â 1.84
Total
$Â Â Â Â Â Â 6.78
Working:
Dividend of
Year:
1
=
$Â Â Â Â Â Â 1.15
*
1.4
=
$Â Â Â Â Â Â 1.61
2
=
$Â Â Â Â Â Â 1.61
*
1.2
=
$Â Â Â Â Â Â 1.93
3
=
$Â Â Â Â Â Â 1.93
*
1.2
=
$Â Â Â Â Â Â 2.32
4
=
$Â Â Â Â Â Â 2.32
*
1.1
=
$Â Â Â Â Â Â 2.55
Step-2:Present value of dividend after year 4
Present value
=
D4*(1+g)/(K-g)*DF4
Where,
=
$Â Â Â 42.53
D4
$Â Â Â Â Â Â 2.55
g
4%
K
8.50%
DF4
0.721574
Step-3:Sum
of present value of future dividends
Sum of present value of future dividends
=
$Â Â Â Â Â Â 6.78
+
$Â Â Â 42.53
=
$Â Â Â 49.31
So,
price of stock is
$Â Â Â 49.31
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
