Question

Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of this stock at a required return of 15 percent?

Answer 1

Answer:

$14.83

Explanation:

D1 = 1.90

D2 = 2.10

D3 (onwards)  = 2.30; meaning growth rate g = 0

Find the Present value of each year's dividend at 15% interest rate;

PV(D1) = 1.90/(1.15) = 1.6522

PV(D2) = 2.10/(1.15²) = 1.5879

PV(D3 onwards) = $\frac{[\frac{2.30}{0.15-0} ]}{1.15^{2} }$ = 11.5942

Next, sum up of these present values of these dividends to find the value of the stock;

1.6522 + 1.5879 + 11.5942 = 14.8343

Therefore, the price of the stock is $14.83