Answer and Explanation:
Dividend = $1.2
Growth (g ) = 18%
Time = 4 year
Discount rate = rs = 15%
Based on the above information, the calculations are as follows
a) Expected Values is
Div 1 = Div 0 × (1 + g)
Div 1 = $1.2 × (1 + .18) = $1.42
Div 2 = $1.42 × (1 +.18) = $1.68
Div 3 = $1.68 × (1 + .18) = $1.98
Div 4 = $1.98 × (1 + .18) = $2.34
b) Expected Stock price 4 years from now, if given discount rate is 15%.
Div 5 = Div 4 × (1 + g)
= $2.34 × (1 + .03)
= $2.41
Now 4 year price is
= Div 5 ÷ (Rs - g)
= $2.41 ÷ (.15 - .03)
= $2.41 ÷ .12
= $20.083
c) Today stock Price is
= [PVF15%,1 × DIV 1] + [PVF15%,2 × DIV 2] + [PVF15%,3 × DIV 3] + [PVF15%,4 × DIV 4] + [PVF15%,4 × TV]
where,
Present Value Factor (PVF) =1 ÷ (1 + r)^n
= [0.08695 × $1.42] + [0.7561 × $1.68] + [0.6575 × $1.98] + [0.5718 × $2.34] +[0.5718 × $20.083]
= $0.123 + $1.270 + $1.301 + $1.338 + $11.483
= $15.515 per share
d) Dividend Yield is
= Div 1 ÷ Price
=$1.42 ÷ $15.515
= 0.0915 or 9.15%
e) Next Year Stock Price is
=[PVF15%,1 × DIV 2] + [PVF15%,2 × DIV 3] + [PVF15%,3 × DIV 4] + [PVF15%,3 × TV]
=[0.08695 × $1.68] + [0.7561 × $1.98] + [0.6575 × $2.34] + [0.6575 × $20.083]
= $0.146 + $1.4971 + $1.5386 + $13.205
= $16.387 per share
f) Expected Rate of Return is
= [P1 - P0 + D1] ÷ P
= [$16.387 - $15.515 + 1.42] ÷ $15.515
= 0.14771 or 14.77%
