Question

Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.52, $1.60, and $1.62 a share over the next three years, respectively. After that, the dividend will be constant at $1.65 per share per year. What is the market price of this stock if the market rate of return is 11 percent

Answer 1

Answer:

The current market price per share is $14.82

Explanation:

The current price of the stock can be calculated using the DDM or dividend discount model. The DDM values the stock based on the present value of the expected future dividends from the stock.

The following is the formula for the price of the stock today,

P0 = D1 / (1+r)  +  D2 / (1+r)^2  + ... +  Dn / (1+r)^n  +  Terminal value

The terminal value is the cumulative value of all the future dividends calculated when the dividend growth becomes zero or constant. In case the dividend growth becomes zero, like in this case, the terminal value is calculated as follows,

Terminal value = Dividend / r

Where,

• r is the required rate of return
• Dividend is the dividend which will remain constant through out the future

So, the price of this stock today is,

P0 = 1.52 / (1+0.11)  +  1.60 / (1+0.11)^2  +  1.62 / (1+0.11)^3  +  

(1.65 / 0.11) / (1+0.11)^3

P0 = $14.82