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Phantasy [73]
3 years ago
8

ABG Corporation has the following dividend forecasts for the next three years: Year Expected Dividend 1 $ .25 2 $ .50 3 $ 1.25 A

fter the third year, the dividend will grow at a constant rate of 5% per year. The required return is 10%. What is the price of the stock today?
Business
1 answer:
MAVERICK [17]3 years ago
7 0

Answer:

Price of share today =  $21.302

Explanation:

<em>The price of a share can be calculated using the dividend valuation model  </em>

<em>According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return</em>.

If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:

Price=Do (1+g)/(k-g)

Do - dividend in the following year, K- requited rate of return , g- growth rate

S<em>tep 1 : PV of dividend from year 1 to 3</em>

Year                                               PV of Dividend

1            0.25 ×  1.1^(-1)         =          0.227

2              0.50  ×  1.1^(-2)     =         0.413

3             1.25   ×   1.1^(-3)      =         0.939

<em />

<em>Strep 2 : PV of dividend from year 4 to infinity</em>

PV (in year 3 terms) of dividend= 1.25 × 1.05/(0.1-0.05) = 26.25

PV in year 0 terms =  26.25 × 1.1^(-3) = 19.72

Present Value =   0.227  +    0.413  + 0.939  +   19.72 =  21.302

Price of share today =  $21.302

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