Trump Office Supplies paid a $6 dividend last year. The dividend is expected to grow at...

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Trump Office Supplies paid a $6 dividend last year. The dividend is expected to grow at a constant rate of 7 percent over the

d. Calculate the present value of the year 4 stock price at a discount rate of 20 percent. (Do not round Intermediate calcula

h. By what dollar amount is the stock price in part g different from the stock price in part ? (Do not round Intermediate cal

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Answer 1

Answer #1

a]

b]

B Dividend PV $5.35 1 Year $6.42 2 1 $6.87 $4.77 2 $7.35 $4.25 4 $7.86 $3.79 5 4 Nm

A. B Dividend PV 1 Year | -B2/(1+20%)^A2 B3/(1+20%)^A3 | -B4/(1+20%)^A4 B5/(1+20%)^A5 -6*1.07 2 1 B2*1.07 3 2 B3 1.07 4 3 B4*

c]

Price of stock at end of 4th year = Year 5 dividend / (required return - constant growth rate)

Year 5 dividend = $7.86 * (1 + 7%) = $8.42

Price of stock at end of 4th year = $8.42 / (20% - 7%) = $64.73.

d]

Present value = future value / (1 + required return)^{number
of years}

Present value = $64.73 / (1 + 20%)⁴

Present value = $31.22.

e]

Current value of stock = total present value of dividends + present value of year 4 stock price

Current value of stock = $5.35 + $4.77 + $4.25 + $3.79 + $31.22 = $49.38

f]

Current value = $6.42 / (20% - 7%) = $49.38

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