Question

The economy has been in a recession, but seems to be recovering. Ebeling Inc.'s stock just paid a dividend of $3.9. The company's dividend is expected to grow at a rate of -0.01 this year, 0.00, next year, and 0.06 for every year after that. If Ebeling has a required rate of return of 0.16, what is the current value of Ebeling's the stock?

Answer 1

As per dividend discount method, current share price is the present value of future dividends.
Step-1:Present value of dividend of next 2 years
Year	Dividend	Discount factor	Present value
a	b	c=1.16^-a	d=b*c
1	$       3.89	0.8621	$       3.35
2	$       3.89	0.7432	$       2.89
Total			$       6.24
Step-2:Calculation of present value of terminal value of dividend at the end of 2 years
Terminal value	=	(D2*(1+g)/(Ke-g))*DF2		Where,
	=	$    30.64		D2(Dividend of year 2)	=	$       3.89
				g (Growth rate)	=	6.00%
				Ke (Required return)	=	16.0%
				DF2 (Discount factor of year 2)	=	0.7432
Step-3:Sum of present value of future dividends
Sum of present value of future dividends	=	$       6.24	+	$    30.64
	=	$    36.89
So, Price of stock is		$    36.89