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Five years ago a XYZ stock paid a $1.15 dividend. Since then it has split two...

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Finance

Five years ago a XYZ stock paid a $1.15 dividend. Since then ithas split two for one once and three for two twice. XYZ currentearnings per share are $1.15, and the plowback ratio is 50%. Thedividends are expected to grow with their historical rate for thenext three years. Beginning year four, XYZ return on equity isexpected to be 9%. If the firm’s appropriate discount rate is 13.5%what the stock price should be? (40 points)

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3.6 Ratings (543 Votes)

1) Dividend paid 5 years ago converted to per share as of
today (that is after adjustment for stock splits) =
= 1.15*(1/2)*(2/3)*(2/3) = $           0.26
2) Current dividend = 1.15*50% = $           0.58
3) Growth rate in dividends for next 3 years = (0.58/0.26)^(1/5)-1 = 17.41%
4) Perpetual growth rate form year 4 = 9%*50% = 4.50%
5) PV of dividends for t1 to t3:
Year Dividend PVIF at 13.5% PV at 13.5%
0 $           0.58 1
1 $           0.68 0.88106 $              0.60
2 $           0.80 0.77626 $              0.62
3 $           0.94 0.68393 $              0.64
PV of dividends for t1 to t3 $              1.86
Terminal value of dividends at t3 = 0.94*1.045/(0.135-0.045) = $           10.91
PV of terminal value = 10.91*0.68393 = $              7.46
Stock price should be $              9.33

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Five years ago a XYZ stock paid a $1.15 dividend. Since then ithas split two for one once and three for two twice. XYZ currentearnings per share are $1.15, and the plowback ratio is 50%. Thedividends are expected to grow with their historical rate for thenext three years. Beginning year four, XYZ return on equity isexpected to be 9%. If the firm’s appropriate discount rate is 13.5%what the stock price should be? (40 points)

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