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Compute the value of a share of common stock of a company whose most recent dividend...

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Finance

Compute the value of a share of common stock of a company whosemost recent dividend was $2.00 and is expected to grow at 6 percentper year for the next 2 years, after which the dividend growth ratewill decrease to 3 percent per year indefinitely. Assume a 12percent required rate of return.

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3.8 Ratings (425 Votes)

i ii iii iv=i+iii v vi=iv*v
year Dividend Terminal value Cash flow PVIF @ 12% present value
1 2.12 2*106%          2.12 0.892857          1.89
2 2.2472 2.12*106%                 25.72       27.97 0.797194       22.29
      30.09       24.19
therefore price today =                 24.19
Computation of terminal value = =dividend in year 3/(required rate - growth rate)
=2.2472*103%/(12%-3%)
                25.72

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Compute the value of a share of common stock of a company whosemost recent dividend was $2.00 and is expected to grow at 6 percentper year for the next 2 years, after which the dividend growth ratewill decrease to 3 percent per year indefinitely. Assume a 12percent required rate of return.

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