Answered

Get the answers you need at Westonci.ca, where our expert community is always ready to help with accurate information. Get detailed and precise answers to your questions from a dedicated community of experts on our Q&A platform. Our platform offers a seamless experience for finding reliable answers from a network of knowledgeable professionals.

Shore Hotels just paid an annual dividend of $1.50 per share. The company will increase its dividend by 7 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 3 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 14 percent

Sagot :

Answer:

$14.85

Explanation:

The computation of the price of the stock today is shown below

But before that following calculation need to be done

D1 i.e.next year's dividend is

= D0(1+g)

= 1.50(1.07)

= 1.605

Now growth rate is

= 7 % - 2%

= 5% or 0.05  

D2 i.e. dividend year 2 is

= D1(1+g)

= 1.605(1.05)

= 1.6853

Now

growth rate is

= 5% - 2%

= 3% or 0.03  

Terminal Cashflow; D3 is

= 1.6853 (1.03)

= 1.7359

Now the present value for each dividend would be

PV(D1) is

= 1.605 ÷ (1.14 )

= 1.4079

PV(D2) is

= 1.6853 ÷ (1.14^2 )

= 1.2968

PV of terminal cash flow (D3) is

= 1.7359 ÷ (14% - 3%) ÷ (1.14)^2

= 12.1429

And, finally the price of the stock today is

= $1.4079 + $1.2968 + $12.1429

= $14.848

= $14.85

We appreciate your time. Please revisit us for more reliable answers to any questions you may have. We hope you found what you were looking for. Feel free to revisit us for more answers and updated information. Keep exploring Westonci.ca for more insightful answers to your questions. We're here to help.