Question

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20 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 $2.00 per share. What is the current value of one share of this stock if the required rate of return is 5.70 percent

Answer 1

Answer:

Current market value =$40.6

Explanation:

The Dividend Valuation Model is a technique used to value the worth of an asset. According to this model, the worth of an asset is the sum of the present values of its future cash flows discounted at the required rate of return.

PV of dividend from year 1 to 4

Year                                                             Present Value

1                 2 × (1.2) ×(1.057)^(-1) =                 2.27

2                  2 × (1.2)^2×(1.057)^(-2)=              2.58

3                 2 × (1.2)^3×(1.057)^(-3) =                2.93

4                  2 × (1.2)^4×(1.057)^(-4)  =             3.32

Total PV =                                                           11.10

PV of dividend from year 1 to 4 = 11.10

PV of dividend from year 5 and beyond

This will be done in two steps:

Step 1: PV (in year 4 terms) of  dividends

( 2 × (1.2)^4× (1-0.05) )/(0.057--(0.05)) = 36.82

Step 2 : PV( in year 0 terms) of dividends

=PV in (year 4 terms)× (1+r)^-4

=36.82  × 1.057^(-4) = 29.50

PV of dividend from year 5 and beyond =29.50

Current market value = Total PV of dividend =  11.10 +  29.50  = $40.6

Current market value =$40.6