Question

ABC Inc. has paid $4.5 dividends per share last year. What is your value estimate for...

ABC Inc. has paid $4.5 dividends per share last year. What is your value estimate for its share price, if investors required rate of return is 12% and the dividends are expected to grow  by 10% for the next two years and after that infinitely at a 4% rate

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Answer #1

Price of Stock = PV of CFs from it.

Div Calculation:

Year CF Formula Calculation
1 $      4.95 D0(1+g) 4.5(1.1)
2 $      5.45 D1(1+g) 4.95(1.1)
3 $      5.66 D2(1+g) 5.45(1.04)

P2 = D3 / [ Ke - g ]

= $ 5.66 / [ 12% - 4% ]

= $ 5.66 / 8%

= $ 70.79

Price of Stock Today:

Year CF PVF @12% Disc CF
1 $      4.95     0.8929 $      4.42
2 $      5.45     0.7972 $      4.34
2 $   70.79     0.7972 $   56.43
Price of Stcok Today $   65.19
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