Question

Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.55, $1.63, and $1.65 a share over the next three years, respectively. After that, the dividend will be constant at $1.70 per share per year. What is the market price of this stock if the market rate of return is 11 percent?

Answer 1

Answer:

Price of stock   =$ 15.31

Explanation:

According to the dividend valuation model , the current price of a stock is the present value of the expected future dividends discounted at the required rate of return.

So we will discount the steams of dividend using the required rate of 11% as follows:

Year                                             Present Value(PV)

1       $1.65 × 1.11^(-1)   =               1.486

2     $1.63× 1.11^(-2)     ==            1.322

3       $1.65× 1.11^(-3)               =  1.2064

Year 4 and beyond

This will be done in two steps

Step 1 :

PV of dividend in year 3  = 1.70/0.11 = 15.45

Step 2

PV of dividend in year 0 =15.45×  1.11^(-3)= 11.30

Price of stock =  1.486+  1.322  + 1.2064 + 11.30

                        =$ 15.31