Question

Could I Industries just paid a dividend of $1.35 per share. The dividends are expected to grow at a rate of 19 percent for the next five years and then level off to a growth rate of 7 percent indefinitely. If the required return is 13 percent, what is the value of the stock today?

Answer 1

Answer:

$38.956

Explanation:

According to dividend valuation model, the value of stock today is the present value of all the dividends that it will receive in future.

Based on the above discussion, the value of stock shall be calculated as follows:

Present value of Year 1 dividend=            $1.42

1.6065(1+13%)^-1

Present value of Year 2 dividend=          $1.496

1.91(1+13%)^-2

Present value of Year 3 dividend=          $1.57

2.27(1+13%)^-3

Present value of Year 4 dividend=         $1.66

2.7013(1+13%)^-4

Present value of Year 5 dividend=        $1.74

3.21(1+13%)^-5

Present value of dividend after Year 5=$31.07

(3.21(1+7%)/(13%-7%))*(1+13%)^-5

Price of share=                                      $38.956