Question

Nachman Industries just paid a dividend of D 0 = $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:

45.011

Explanation:

The current market value of a share is  the present value of future dividends in perpetuity, discounted at the cost of  equity (i.e. the return required by the providers of equity capital).

Based on the above discussion the share price shall be calculated as:

Present value of year 1 dividend=1.72(1+9%)^-1=1.58

(1.32*1.30=1.72)

Present value of year 2 dividend=1.89(1+9%)^-2=1.591

(1.72*1.10=1.89)

Present value of year 3 dividend=1.98(1+5%)^-3=1.71

(1.89*1.05=1.98)

Present value of all dividends after year 3=(d(1+g)/ke-g)(1+ke)^-3=(1.98(1+5%)/9%-5%)(1+9%)^-3=40.13

Current market value of share=45.011

(1.58+1.591+1.71+40.13)