question archive Company ABC has just paid dividend of $40
Company ABC has just paid dividend of $40
Subject:FinancePrice:3.87 Bought7
Company ABC has just paid dividend of $40. ABC dividends growth rate is expected to be equal to 5% for the coming 5 years, 10% for the next 5 years, and 2% thereafter. What is the price of ABC stock today if the required rate of return on ABC's equity is 10%?
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Answer:
Terminal Value at 10th year = Dividend10*(1+g)/(r-g) = 82.21957*(1.02)/(10%-2%) = $1,048.30
| Year | Dividend | Terminal Value | Cashflow | Pv Factor | Present Value |
| 1 | $ 42.00 | $ 42.00 | 0.9091 | $ 38.18 | |
| 2 | $ 44.10 | $ 44.10 | 0.8264 | $ 36.45 | |
| 3 | $ 46.31 | $ 46.31 | 0.7513 | $ 34.79 | |
| 4 | $ 48.62 | $ 48.62 | 0.6830 | $ 33.21 | |
| 5 | $ 51.05 | $ 51.05 | 0.6209 | $ 31.70 | |
| 6 | $ 56.16 | $ 56.16 | 0.5645 | $ 31.70 | |
| 7 | $ 61.77 | $ 61.77 | 0.5132 | $ 31.70 | |
| 8 | $ 67.95 | $ 67.95 | 0.4665 | $ 31.70 | |
| 9 | $ 74.74 | $ 74.74 | 0.4241 | $ 31.70 | |
| 10 | $ 82.22 | $ 1,048.30 | $ 1,130.52 | 0.3855 | $ 435.86 |
| Present Value of stock | $ 736.98 |
