Question

Apocalyptica Corporation is expected to pay the following dividends over the next four years: $8.00, $6.00, $4.75, and $2.25. Afterwards, the company pledges to maintain a constant 4.5 percent growth rate in dividends, forever.

If the required return on the stock is 10 percent, what is the current share price?

Please done in excel sheet and show the whole workings.

Answer 1

Current share price is $ 46.54

As per dividend discount method, current share price is the present value of future dividends.
Step-1:Present value of dividend of next four years
Year	Dividend	Discount factor	Present value
a	b	c=1.10^-a	d=b*c
1	$       8.00	0.9091	$       7.27
2	$       6.00	0.8264	$       4.96
3	$       4.75	0.7513	$       3.57
4	$       2.25	0.6830	$       1.54
Total			$    17.34
Step-2:Calculation of terminal value of dividend at the end of four years
Terminal value	=	D4*(1+g)/(Ke-g)*DF4		Where,
	=	$    29.20		D4(Dividend of year 4)	=	$       2.25
				g (Growth rate in dividend)	=	4.5%
				Ke (Required return)	=	10%
				DF4 (Discount factor of year 4)	=	0.6830
Step-3:Sum of present value of future dividends
Sum of present value of future dividends	=	$    17.34	+	$    29.20
	=	$    46.54
So, Price of stock is		$    46.54