Question

Combined communications is a new firm in a rapidly growing industry. the company is planning on increasing its annual dividend by 21 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. the company just paid its annual dividend in the amount of $1.10 per share. what is the current value of one share of this stock if the required rate of return is 8.50 percent? $52.25 $45.73 $57.36 $56.86

Answer 1

The annual Dividend (D0) = $1.10

D1 = $1.10 * (1+0.21)^1 = $1.33

D2 = $1.10* (1+0.21)^2 = $1.61

D3 = $1.10* (1+0.21)^3 = $1.95

D4 = $1.10 * (1+0.21)^4 = $2.36

D5 = $1.10*(1+0.05) = $2.48

Now the price of the stock at the end of the fourth year (P4) = $2.48/(0.085-0.05)

P4 = $2.48 / (0.035)

P4 = $70.85

Now the Price of the stock (P0) = $1.33/(1+0.085) + $1.61/(1+0.085)^2 +$1.95/(1+0.085)^3 + $2.36/(1+0.085)^4 + $70.86/(1+0.085)^4

Price of the stock (P0) = $1.23 +$1.37 + $1.53 + $1.70 + $51.13

Price of the stock (P0) = $56.86

Therefore the correct option is d, $56.86