Assume that at the end of the next year, Company A will pay $ 2.00 dividend per
ID: 2726486 • Letter: A
Question
Assume that at the end of the next year, Company A will pay $ 2.00 dividend per share, an increase from the current dividend of $1.50 per share. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, what is the value of the stock?
A stock is not expected to pa dividends until 3 years from now. The dividend is then expected to be $2 per share, the dividend payout ratio is expected to be 40%, and the return on equity is expected to be 15%. If the required rate of return is 12%, the value of the stock today is closed to
Explanation / Answer
1)Value of stock = D1 / (Rs-g)
= 2 / (.12 - .05)
= 2 / .07
= $ 28.57 per share
2) Growth :ROE*(1-Payoutratio)
= 15*(1-.40)= 9%
Value of dividend at end of year 3 = D4/(rs-g)
= 2/(.12-.09)
= 66.6667
Valu of stock today =PVF@12%,3 * P3
= .71178 * 66.6667
= $ 47.45