Could I Industries just paid a dividend of $1.75 per share. The dividends are ex
ID: 2772200 • Letter: C
Question
Could I Industries just paid a dividend of $1.75 per share. The dividends are expected to grow at a 17 percent rate for the next 4 years and then level off to a 7 percent growth rate indefinitely. If the required return is 15 percent, what is the value of the stock today?
Could I Industries just paid a dividend of $1.75 per share. The dividends are expected to grow at a 17 percent rate for the next 4 years and then level off to a 7 percent growth rate indefinitely. If the required return is 15 percent, what is the value of the stock today?
Explanation / Answer
Calculation of Current Share Price:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Expected Dividend
$ 2.0475
$ 2.3956
$ 2.8028
$ 3.2793
$ 3.5089
(1.75*117%)
(2.0475*117%)
(2.3956*117%)
(2.8028*117%)
(3.2793*107%)
Terminal Value at the end of year 4
$ 43.86
= Expected Dividend (Y-5) / (Required rate - Growth rate )
3.5089 / (15%-7%)
Total Cash Inflows (A)
$ 2.05
$ 2.40
$ 2.80
$ 47.14
PVF (15%) (B)
1.00000
0.86957
0.75614
0.65752
0.57175
Present value (PV) = A*B
$ 1.78
$ 1.81
$ 1.84
$ 26.95
Current Share Price (Sum of PVs)
$ 32.39
Calculation of Current Share Price:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Expected Dividend
$ 2.0475
$ 2.3956
$ 2.8028
$ 3.2793
$ 3.5089
(1.75*117%)
(2.0475*117%)
(2.3956*117%)
(2.8028*117%)
(3.2793*107%)
Terminal Value at the end of year 4
$ 43.86
= Expected Dividend (Y-5) / (Required rate - Growth rate )
3.5089 / (15%-7%)
Total Cash Inflows (A)
$ 2.05
$ 2.40
$ 2.80
$ 47.14
PVF (15%) (B)
1.00000
0.86957
0.75614
0.65752
0.57175
Present value (PV) = A*B
$ 1.78
$ 1.81
$ 1.84
$ 26.95
Current Share Price (Sum of PVs)
$ 32.39