Question

West Side Co. is expecting the following dividends to be paid over the next 5 years: $3, $4, $5, $6, $7. Afterwards, the company pledges to maintain a constant growth rate of 2%, forever. If the required rate of return is 9%, calculate the current share price. (Round to 2 decimals)

Answer 1

Answer:

$85.07

Explanation:

The computation of the current share price is shown below:

Year          Dividend Terminal value Total cash flow PVIF at 9% Present value

1           $3.00                                  $3.00          0.9174 $2.75  

2           $4.00                                   $4.00          0.8417 $3.37

3           $5.00                                  $5.00          0.7722 $3.86  

4          $6.00                                   $6.00          0.7084 $4.25  

5          $7.00 $102.00                          $109.00          0.6499 $70.84      

                                                                                                                $85.07

The terminal value is

= 7 × 102% ÷ (9%-2%)