Question

Company DIMOND just paid annual dividend of $5 today. The dividend is expected to grow at 3% for the next 5 years, then it will grow at 5% in perpetuity. If stocks of similar company earn 9% annual return, what is the price of a share of Company DIMOND stock?

Answer 1

Answer:

$120.05

Step-by-step explanation:

Div₀ = $5

Div₁ = $5.15

Div₂ = $5.3045

Div₃ = $5.463635

Div₄ = $5.62754405

Div₅ = $5.796370372

Div₆ = $6.08618889

first we must determine the terminal value on year 5:

terminal value = $6.08618889 / (9% - 5%) = $152.1547223

now we determine the present values of our future dividends + terminal value = $5.15/1.09 + $5.3045/1.09² + $5.463635/1.09³ + $5.62754405/1.09⁴ + $5.796370372/1.09⁵ + $152.1547223/1.09⁵ = $4.724 + $4.464 + $4.219 + $3.987 + $3.767 + $98.890 = $120.05