Question

Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock’s current market value? $41.59 $42.65 $43.75 $44.87 $45.99

Answer 1

Answer:

Stock's current market value = $44.87

Explanation:

We can solve this stock valuation problem using DDM (Dividend Discount Model).

Lets find the dividends for the years:

D0 = $1.32

D1 = $1.32*1.3 = $1.716

D2 = $1.716*1.1 = $1.888

D3 = $1.888*1.05 = $1.982

The formula of stock valuation:

$P_n=\frac{D_{n+1}}{k_e-g}$

Lets calculate the terminal value after Year 3 afterwards:

$P_n=\frac{D_{n+1}}{k_e-g}\\P_n=\frac{1.982}{0.09-0.05}\\P_n=49.55$

Note: rate of return, k_e = 0.09 (given) and growth rate (g) is 5% or 0.05

Now,

The present value of the stocks is gotten using formula:

$P_n=\frac{D_{n+1}}{(1+r)^n}+\frac{Terminal}{(1+r)^n}$

So, we have:

$P_0=\frac{1.716}{1.09}+\frac{1.888}{1.09^2}+\frac{49.55}{1.09^2}\\P_0=44.87$

Stock's current market value = $44.87