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wharton manufacturing just paid its annual dividend in the amount of 1
wharton manufacturing just paid its annual dividend in the amount of 1.05. the company will increase its dividends by 25 percent per year for the next 7 years, after that the company will keep a constant growth rate of 3 percent per year, forever. if the required return is 11 percent, what is the current stock price of wharton manufacturing?
Expert Solution
Dividend in year 1 = Current Dividend * (1 + growth rate)
Dividend in year 1 = 1.05 * (1 + 25%)
Dividend in year 1 = 1.3125
Dividend in year 2 = Dividend in year 1 * (1 + growth rate)
Dividend in year 2 = 1.3125 * (1 + 25%)
Dividend in year 2 = 1.6406
Dividend in year 3 = Dividend in year 2 * (1 + growth rate)
Dividend in year 3 = 1.6406 * (1 + 25%)
Dividend in year 3 = 2.0508
Dividend in year 4 = Dividend in year 3 * (1 + growth rate)
Dividend in year 4 = 2.0508 * (1 + 25%)
Dividend in year 4 = 2.5635
Dividend in year 5 = Dividend in year 4 * (1 + growth rate)
Dividend in year 5 = 2.5635 * (1 + 25%)
Dividend in year 5 = 3.2043
Dividend in year 6 = Dividend in year 5 * (1 + growth rate)
Dividend in year 6 = 3.2043 * (1 + 25%)
Dividend in year 6 = 4.0054
Dividend in year 7 = Dividend in year 6 * (1 + growth rate)
Dividend in year 7 = 4.0054 * (1 + 25%)
Dividend in year 7 = 5.0068
Share price in year 7 = (Dividend in year 7 * (1 + growth rate)) / (Required rate - growth rate)
Share price in year 7 = (5.0068 * (1 + 3%)) / (11% - 3%)
Share price in year 7 = 64.4624
Current Share price = Dividend in year 1 / (1 + Required rate)1 + Dividend in year 2 / (1 + Required rate)2 + Dividend in year 3 / (1 + Required rate)3 + Dividend in year 4 / (1 + Required rate)4 + Dividend in year 5 / (1 + Required rate)5 + Dividend in year 6 / (1 + Required rate)6 + (Dividend in year 7 + Share price in year 7) / (1 + Required rate)7
Current Share price = 1.3125 / (1 + 11%)1 + 1.6406 / (1 + 11%)2 + 2.0508 / (1 + 11%)3 + 2.5635 / (1 + 11%)4 + 3.2043 / (1 + 11%)5 + 4.0054 / (1 + 11%)6 + (5.0068 + 64.4624) / (1 + 11%)7
Current Share price = 43.2056 or 43.21
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