Phillips, Inc. just paid a dividend of $3.25 per share on its common stock (that
ID: 2762740 • Letter: P
Question
Phillips, Inc. just paid a dividend of $3.25 per share on its common stock (that is, Do = 3.25). Investors expect the dividend to grow at 40% in years 1 and 2, they expect the dividend to grow at 20% in year 3 and they expect that all future dividends (that is, dividends in years 4, 5, ..., infinity) to grow at a constant rate of 5% per year. If the cost of capital for Phillips, Inc. stock is 15%, what is the current price of the stock IBIS Corporation has had dividends grow from $2.50 per share to $6.50 per share over the last 10 years (the $6.50 per share dividend was paid yesterday; that is, D_0 = $6.50). This compounded annual growth rate in dividends is expected to continue into the future forever. If the current market price of IBIS's stock is $45.00 per share, what rate of return do investors expect to receive from buying IBIS stockExplanation / Answer
25
26
Growth rate =( (year 10 dividend/dividend yesterday)^(1/number of years)-1)*100
=((6.5/2.5)^(1/10)-1)*100
=10.03%
Price = recent dividend* ( 1 + growth rate )/( required rate of return - growth rate)
45= 2.5*(1+.1003)/(required rate of return-0.1003)
required rate of return = 16.14%
required return = 15.0% Year Previous year dividend Dividend growth rate Dividend current year Terminal value Total Value Discount factor Discounted value 1 3.25 40.0% 4.55 4.55 1.15 3.956521739 2 4.55 40.0% 6.37 6.37 1.3225 4.816635161 3 4.55 20.0% 5.46 57.33 62.79 1.520875 41.28544423 Long term growth rate= 5.00% Value of stock = Sum of discounted value 50.05860113