Answer:
$200.17
Explanation:
Step 1: Calculation of dividend for the next 4 years
To do this, we use the following formula:
Dt = Do × (1 + g) ........................................ (1)
Wheree;
Dt = next year dividend
Do = current year dividend
g = dividend growth rate = 16% = 0.16
We employ equation (1) as follows:
For Year 1:
D1 = ?
Do = $1.60
g = 0.16
Therefore,
D1 = $1.60 × (1 + 0.16) = $1.60 × 1.16 = $1.8560
For Year 2:
D2 = ?
Do = D1 = $1.8560
g = 0.16
Therefore,
D2 = $1.8650 × (1 + 0.16) = $1.850 × 1.16 = $2.1530
For Year 3:
D3 = ?
Do = D2 = $2.1530
g = 0.16
Therefore,
D3 = $2.1530 × (1 + 0.16) = $2.1530 × 1.16 = $2.4974
For Year 4:
D3 = ?
Do = D3 = $2.4974
g = 0.16
Therefore,
D4 = $2.4974 × (1 + 0.16) = $2.4974 × 1.16 = $2.8970
Step 2: Calculation of the value of one share of this corporation's stock in fourth year.
To do this, we employ the following dividend growth model use in calculating stock price as follows:
Stock price = D4 ÷ (r - ng) ........................................ (2)
Where;
D4 = $2.8970 (as calculated in Step 1 above)
r = required rate of return = 7.10% = 0.0710
ng = new dividend growth rate = 6% = 0.06
We can therefore substitute as follows:
Stock price in 4th year = $2.8970 ÷ (0.0710 - 0.060)
= $2.8970 ÷ 0.110
Stock price in 4th year = $263.37.
Therefore, the value of one share of this corporation's stock in 4th year is $263.37.
Step 3: Calculation of the current or present value of one share of this corporation's stock.
To do this, we use the PV formula as follows:
Current or present value = $263.37 ÷ (1 + 0.0710)^4
= $263.37 ÷ (1.0710)^4
= $263.37 ÷ 1.3157
Current or present value = $200.17
Therefore, the current value of one share of this corporation's stock is $200.17.
