Question

the growth in dividends of abc, inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. after this five-year period, the growth in dividends is expected to be 5% per year, indefinitely. the required rate of return on abc, inc. is 12%. the trailing twelve months of dividends per share were $2.00. what should the stock sell for today?

Answer 1

If ABC, Inc. dividend growth is anticipated to increase by 15% annually over the next three years, the stock should be sold for 27.74 now.

Year Growth rate Expected Dividend Expected Value of Dividend Discount Factor required rate Certainty Adjusted Value of Dividend

0   1.85      

1 15.00%            2.1275000            2.1275000            0.8849558            1.8827434

2 15.00%            2.4466250            2.4466250            0.7831467            1.9160663

3 15.00%            2.8136188            2.8136188            0.6930502            1.9499789

4 8.00%            3.0387083            3.0387083            0.6133187            1.8636967

5 8.00%            3.2818049          32.8180491            0.6133187          20.1279241

                    27.740409

                   

   Growth Rate forever Required Rate   Value (Total)

   3.00% 13.00%                 27.74

A security that denotes ownership of a portion of the issuing company is referred to as a stock, also known as equity. Shares, which are units of stock, entitle its owners to a percentage of the company's assets and income based on how many shares they possess.

The cornerstone of many individual investors' portfolios, stocks are mostly bought and sold on stock exchanges. Government rules aimed at shielding investors from dishonest tactics must be followed when trading stocks.

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