Caan Corporation will pay a $2.62 per share dividend next year. The company pled
ID: 2774818 • Letter: C
Question
Caan Corporation will pay a $2.62 per share dividend next year. The company pledges to increase its dividend by 4.5 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Caan Corporation will pay a $2.62 per share dividend next year. The company pledges to increase its dividend by 4.5 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Solution:
Company's stock value today = Present value of future dividends from next year
Now, Dividend next year (D1) = $2.62, After that dividend will grow at (g) = 4.5% for indefinite years, Required rate of return (K) = 10%
Now, Terminal value of dividends paid after year 1 = D1*(1+g)/(K-g)
= 2.62*(1+4.5%)/(10%-4.5%)
= 49.78
Hence, total value of dividends next year = Dividend (D1) + Terminal value of dividends after year 1
= 2.62 + 49.78
= 52.40
Now , Discounting factor = 1/(1+K)
= 1/(1+10%)
= 0.90909
Hence, present value of all dividends = future value of dividends * discounting factor
= 52.40 * 0.90909
= 47.6363
Hence, company's stock value today = $47.64