Question

paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.55, $1.63, and $1.65 a share over the next three years, respectively. After that, the dividend will be constant at $1.70 per share per year. What is the market price of this stock if the market rate of return is 11 percent

Answer 1

Answer:

The market price for this stock is $15.23

Explanation:

The price per share of a stock today can be calculated using the dividend discount model which values a stock based on the present value of the expected future dividends of the stock. The value of this stock using the DDM will be,

V0 or P0 =  1.55 / (1+0.11)  +  1.63 / (1+0.11)^2  +  1.65 / (1+0.11)^3  +  

[ ( 1.7 / 0.11) / (1+0.11)^3 ]

V0 or P0 = $15.226 rounded off to $15.23

Answer 2

Answer:

Market price= $15.226

Explanation:

The Dividend Valuation Model is a technique used to value the worth of an asset. According to this model, the worth of an asset is the sum of the present values of its future cash flows discounted at the required rate of return.

Year

1    $1.55, × (1.11)^(-) = 1.396396396

2    $1.63 ×  1.11^(-2) =  1.322944566

3     $1.65 ×  1.11^(-3)= 1.206465779

4 and beyond

This will be done in two stages below

PV of dividend in year 3

1.70/0.11 = 15.45454545

PV of dividend in year 0

15.45 × 1.11^(-3) = 11.3002

Market price of share

=1.39+ 1.322+ 1.206 + 11.300

= 15.226