Question

Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $5.85 per share and has announced that it will increase the dividend by $10.75 per share for each of the next four years, and then never pay another dividend. If you require a return of 12 percent on the company’s stock, how much will you pay for a share today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share price $

Answer 1

Answer:

The present intrinsic value of the share is 94.79 dollars

Explanation:

We need to discount the future dividends at the required rate of return

$\left[\begin{array}{ccc}Year&Cashflow&Discounted\\0&5.85&\\1&16.6&14.82\\2&27.35&21.8\\3&38.1&27.12\\4&48.85&31.05\\TOTAL&&94.79\\\end{array}\right]$

Each year is discount according to the lump sum formula

$\frac{cashflow}{(1 + rate)^{time} } = PV$

being rate 12% --> 0.12

$\frac{16.6}{(1 + 0.12)^{1} } = 14.82$

$\frac{27.35}{(1 + 0.12)^{2} } = 21.8$

and so on

Answer 2

Answer: $94.79

Explanation:

Given the following ;

Current dividend = $5.85 per share

Yearly increment in dividend = $10.75 per share

Number of years = 4

Time (t) = 1-4

Internal rate of return = 12%

Calculate the present value of share given the above details

Cashflow over four years

Year1 = $5.85 + $10.75 =$16. 60

Year2 = $16.60 + $10.75 = $27.35

Year3 = $27.35 + $10.75 = $38.10

Year 4 = $38.10 + $10.75 = $48.85

Present value (PV) =

Cashflow÷(1+IRR) + cashflow÷(1+IRR)^t + cashflow÷(1+IRR)^t + cashflow÷(1+IRR)^t

Present value (PV) =

Year1÷(1+IRR) + year2÷(1+IRR)^2 + Year3÷(1+IRR)^3 + Year4÷(1+IRR)^4

PV = $16.60/(1.12) + ($27.35)/(1.12)^2+ $38.10/(1.12)^3 + $48.85/(1.12)^4 = $94.79