Question

Suppose firm X just paid its annual dividend of $2.00 per share. You expect that the firm will continue to pay $2.00 per share (per year) for the next 10 years (times t=1 through 10), after which point you expect that the annual dividend per share will grow by 12% every year thereafter (forever). If the required rate of return is 15%, what is the current price per share?

Answer 1

Answer:

Current price per share = $10.54

Explanation:

Note: See the attached file for the calculation of present values (PV) for year 1 to 10 dividends.

From the attached excel file, we have:

Total of dividends from year 1 to year 10 = $10.0375372517085

Year 10 dividend = $0.494369412243732

Therefore, we have:

Year 11 dividend = Year 10 dividend * (100% + Dividend growth rate after year 10) = $0.494369412243732 * (100% + 12%) = $0.55369374171298

Share price at year 10 = Year 11 dividend / (Required return rate - Dividend growth rate after year 10) = $0.55369374171298 / (15% + 12%) = $2.05071756189993

PV of share price at year 10 = Share price at year 10 / (100% + Required return rate)^Number of years = $2.05071756189993 / (100% + 15%)^10 = $0.506906017877183

Therefore, we have:

Current price per share = Total of dividends from year 1 to year 10 + PV of share price at year 10 = $10.0375372517085 + $0.506906017877183 = $10.54

Download xlsx