Answered

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The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $2.90 per share. What is the current value of one share of this stock if the required rate of return is 8.40 percent

Sagot :

Answer:

$130.97

Explanation:

The value of the firm can be determined by finding the present value of the dividend payments using the two stage dividend growth model

In the 2 stage dividend growth model, dividend is characterised by a fast growth. After this stage , growth in dividend becomes stable

Present value in the first year = (2.90 x 1.15) / 1.084 = $3.08

Present value in the second year = (2.90 x 1.15²) / 1.084² = $3.26

Present value in the third year = (2.90 x 1.15³) / 1.084³ = $3.46

Present value in the fourth year = (2.90 x [tex]1.15^{4}[/tex]) / [tex]1.084^{4}[/tex] = $3.67

Present value in the second stage = ($3.67 x 1.06) / (0.084 - 0.06) = $162.24

$162.24 / [tex]1.084^{4}[/tex] = $117.50

The value of the stock = sum of present values in the first stage of growth + present value in the second stage of growth

$3.08 + $3.26 + $3.46 + $3.67 +  $117.50 = $130.97

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