Question

8. The J Peterman Corporation has had a rough year, and has currently suspended dividend payments. Two years from now they anticipate paying dividends once again, when $0.80 per share will be paid. The following year they will pay $1.10, and the year after that $1.50. Beyond that point, dividends should grow 4% a year for the foreseeable future. If you require an 13.5% return for investing in this stock, what is a share of the stock worth to you today?

Answer 1

Answer:

The worth of stock today is $12.17.

Explanation:

A Multi-Period Dividend Discount Model should be used to determine the worth of stock today.

                                                Year-1        Year-2            Year-3            Year-4

Dividends                                     -              $.80                $1.10              $1.50

Discount Factor                           -              .7763              .6840             .6026

Present Values                            -              .6210              .7524             .9039

Perpetuity (1.50)*(1 + 4%) = $1.56

Terminal Value = 1.56 / (13.5% - 4%) = $16.4210

PV of Terminal Value = Terminal Value * Discount Factor

⇒ PV of Terminal Value = 16.4210 * (1.135)^(-4) = $9.8950.

Add the Present values of Dividends with the PV of Terminal Value to get the Stock Price of Today.

⇒Stock Price = .6210 + .7524 + .9039 + 9.8950 = $12.17.

Thanks!