Year 1, 2, 3, and 4... Dividends are expected to be $2, $4, $6, and $8....
Year 1, 2, 3, and 4... Dividends are expected to be $2, $4, $6, and $8. After the 4th year, the dividend will grow at a constant rate of 5% per year. The required return is 10%. What is the value of the stock today?
Please show your work!
Homework Answers
Value after year 4=(D4*Growth rate)/(Required rate-Growth rate)
=(8*1.05)/(0.1-0.05)
=168
Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)
=2/1.1+4/1.1^2+6/1.1^3+8/1.1^4+168/1.1^4
=$129.84(Approx).
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