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A company's dividend this year is $2
A company's dividend this year is $2.25 per share, and dividends are expected to grow at 12% for the next four years and at 5% indefinitely after that. If the firm's discount rate is 8%, what is the value of one share today?
Expert Solution
| Required rate= | 8.00% | ||||||
| Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
| 1 | 2.25 | 12.00% | 2.52 | 2.52 | 1.08 | 2.3333 | |
| 2 | 2.52 | 12.00% | 2.8224 | 2.8224 | 1.1664 | 2.41975 | |
| 3 | 2.8224 | 12.00% | 3.161088 | 3.161088 | 1.259712 | 2.50937 | |
| 4 | 3.161088 | 12.00% | 3.54041856 | 123.915 | 127.4554186 | 1.36048896 | 93.68354 |
| Long term growth rate (given)= | 5.00% | Value of Stock = | Sum of discounted value = | 100.95 | |||
| Where | |||||||
| Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||||||
| Total value = Dividend + horizon value (only for last year) | |||||||
| Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||
| Discount factor=(1+ Required rate)^corresponding period | |||||||
| Discounted value=total value/discount factor |
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