Question

Section B Answer the following problems. Show your calculations 1. Shark Bait, Inc. just paid annual dividend of $2.00. The com 10%, 9%, 8%, 6% and 5% over the next five years. rate of 4%. If the required rate of return is 14%, what red rate of next five The company is expected to grow its divided by er that the dividend is going to grow at a constant 4%, what is the company's current stock price? (15 pts) 1 2 3 4 5 1 6 Dividen 2.20/2.40/2.59 | 2.75 2.89|3.01 91 110% 9% 8% 6% 5% 4% 2 3 4 5 Dividen (22/2.40 2.59 275/2.89 TV PVEFF 1.93 1.85 1.75 1.63 1.50 (FCF-C1tg)) Icd-g)

Answer 1

Calculation of Dividend of 5 years

Year	0	1	2	3	4	5
Dividend	2.00	2.20	2.40	2.59	2.75	2.88
Dividend growth rate		10%	9%	8%	6%	5%

.

Terminal Value of Dividend (from Gordon Growth Model)

Terminal Value = [Last Dividend * (1+growth rate)] / (Required rate of return - growth rate)

Terminal Value = [2.88 * (1+4%)] / (14% - 4%)

Terminal Value = 2.9952 / 10% = 29.95

Calculation of Present value of dividend

Year	0	1	2	3	4	5	Terminal
Dividend	2.00	2.20	2.40	2.59	2.75	2.88	29.95
Discounting Factor @ 14%		0.877193	0.769468	0.674972	0.59208	0.519369	0.519369
Present value		1.93	1.85	1.75	1.63	1.50	15.56
Net Present value	24.20

Company's Current Stock Price = 24.20

Note 1: Terminal Dividend is the value of all the future dividends at the end of year 5 and therefore discounting factor of year 5 is used.

Note 2: Share Price without rounding off will be 24.22

2.00000 Year Dividend Dividend growth rate Terminal Value Discounting Factor @ 14% 2.20000 10% 2 2.39800 9% 3 2.58984 8% 4 5 Terminal 2.74523 2.88249 2.99779 6% 5% 4% 29.978 0.59208 0.519369 0.519369 0.877193 0.769468 0.674972 Present value 1.93 1.85 1.75 1.63 1.50 15.569590 || Net Present value 24.22 T T T T T