is a relatively new firm that appears to be on the road to great success. The company paid its first annual dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that time, it is planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.5%?

Question

Haley Keith

Business

2 September, 12:23

is a relatively new firm that appears to be on the road to great success. The company paid its first annual dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that time, it is planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.5%?

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Alexandria Casey · Answer 1

The price of the stock today is $12.43

Explanation:

The price of the share today can be calculated using the DDM approach whereby discount the expected future cashflows by the required rate of return and calculating the perpetuity value or terminal value where the growth becomes zero.

The price of the Stock today is,

P0 = 0.28 * (1+1) / (1+0.115) + 0.28 * (1+1) ² / (1+0.115) ² + 0.28 * (1+1) ³ / (1+0.115) ³ + [ (1.5 / 0.115) / (1+0.115) ³]

P0 = $12.428 rounded off to $12.43