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umka21 [38]
3 years ago
14

OMG Corporation just paid a $1.60 annual dividend on each share. It is planning on increasing its dividend by 16 percent a year

for the next 4 years. The corporation will then decrease the growth rate to a rate of 6 percent per year, and keep it that way indefinitely. The required rate of return is 7.10 percent. Calculate the current value of one share of this corporation's stock.
Business
1 answer:
mamaluj [8]3 years ago
8 0

Answer:

$220.028

Explanation:

According to dividend valuation model, the price of share is the present value of all the dividends that the share will give in future.

Based on the above statement the price of the share of the OMG Corporation  shall be determined as follows:

Present value of year 1 dividend=1.856(1+7.10%)^-1            $1.733

(1.60*1.16)

Present value of year 2 dividend=2.153(1+7.10%)^-2           $1.88

(1.856*1.16)

Present value of year 3 dividend=2.497(1+7.10%)^-3          $2.033

(2.153*1.16)

Present value of year 4 dividend=2.897(1+7.10%)^-4          $2.202          

(2.497*1.16)

Present value of all dividends after year 4=                        $212.18

[2.897(1+6%)/7.10%-6%]*(1+7.10%)^-4

Price of share                                                                        $220.028

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Trial Income Statement:

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Rent expense            ($3,500)

Insurance expense      ($350)

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Dr Cash 60,000

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July 19

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Dr Dividends payable 600

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