Question

Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

Answer 1

Answer:

$44.87

Explanation:

Use Dividend Discount Model to solve this question;

First, find the dividend per year;

First year's dividend ; D1 = D0(1+g)

D1 = 1.32 (1.30) = 1.716

Second year's dividend ; D2 = 1.716 (1.10) = 1.8876

Third year's dividend ; D3 = 1.8876 (1.05) = 1.9820

Next, find the present value of each dividend at 9% required return;

PV (D1) = 1.716 / (1.09) = 1.5743

PV (D2) = 1.8876 /(1.09²) = 1.5888

PV (D3 onwards) = $\frac{\frac{1.9820}{0.09-0.05} }{1.09^{2} } \\ \\ = \frac{47.19}{1.1881}$

= PV (D3 onwards) = 41.7052

Sum up the PVs to find the current market value of the stock;

= 1.5743 + 1.5888 + 41.7052

= 44.8683

Therefore the value is $44.87