Tiffany common stock dividends have been growing at an annual rate of 6% per yea
ID: 2650369 • Letter: T
Question
Tiffany common stock dividends have been growing at an annual rate of 6% per year for the past 10 years. current dividends are $1.75 per share. what is the current value of a share of this stock to an investor who requires a 12% rate of return if the following conditions exist?
1. the dividend growth rate is expected to increase to 8% per year
2. The dividend growth rate is expected to decrease to 4% per year
3. Dividends are expected to continue growth at the historic rate for the foreseeable future.
Explanation / Answer
Answer:
Given :
Growth rate (g) = 6% = 0.06
Current dividend (D0) =$1.75
Required rate (Ke) =12% =0.12
Stock Price (P0) = D0*(1+g) /(Ke-g)
Calculation of stock Price :
Situation 1:
Growth rate (g) = 8% = 0.08
Current dividend (D0) =$1.75
Required rate (Ke) =12% =0.12
Stock Price (P0) = D0*(1+g) /(Ke-g)
= 1.75* (1+0.08) /(0.12-0.08)
=1.89 /0.04
=$47.25
Situation 2:
Growth rate (g) = -4% = -0.04
Current dividend (D0) =$1.75
Required rate (Ke) =12% =0.12
Stock Price (P0) = D0*(1+g) /(Ke-g)
= 1.75* (1-0.04) /(0.12+0.04)
=1.68 /0.16
=$10.50
Situation 3:
Growth rate (g) = 6% = 0.06
Current dividend (D0) =$1.75
Required rate (Ke) =12% =0.12
Stock Price (P0) = D0*(1+g) /(Ke-g)
= 1.75* (1+0.06) /(0.12-0.06)
=1.855 /0.06
=$30.92