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Four years ago, XYZ company paid a dividend of $0.80 per share. Today XYZ paid a...

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Finance

Four years ago, XYZ company paid a dividend of $0.80 per share.Today XYZ paid a dividend of $1.66 per share. It is expected thatthe company will pay dividends growing at this same rate for thenext 5 years. Thereafter, the growth rate will level off at 8% peryear. The current stock price is $30. If the required return onthis stock remains at 18%, should you buy the stock?

Please show all steps. Don't round off until you get to theend.

Answer & Explanation Solved by verified expert
3.9 Ratings (468 Votes)

Annual average growth rate=((last value/First value)^(1/Time between 1st and last value)-1)*100
Annual Growth rate=((1.66/0.8)^(1/4)-1)*100
Annual Growth rate% = 20.02
Required rate= 18.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 1.66 20.02% 1.992332 1.992332 1.18 1.6884
2 1.992332 20.02% 2.391196866 2.391196866 1.3924 1.71732
3 2.391196866 20.02% 2.869914479 2.869914479 1.643032 1.74672
4 2.869914479 20.02% 3.444471358 3.444471358 1.93877776 1.77662
5 3.444471358 20.02% 4.134054524 44.648 48.78205452 2.287757757 21.32309
Long term growth rate (given)= 8.00% Value of Stock = Sum of discounted value = 28.25
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

Donot buy as CMP of 30 is more than 28.25 (intrinsic value)
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Transcribed Image Text

Four years ago, XYZ company paid a dividend of $0.80 per share.Today XYZ paid a dividend of $1.66 per share. It is expected thatthe company will pay dividends growing at this same rate for thenext 5 years. Thereafter, the growth rate will level off at 8% peryear. The current stock price is $30. If the required return onthis stock remains at 18%, should you buy the stock?Please show all steps. Don't round off until you get to theend.

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