Question

The XYZ Company currently (that is, as of year 0) pays a common stock dividend of $1.5 per share. Dividend are expected to grow at a rate of 11% per year for the next 4 years and then continue growing thereafter at a rate of 5% per year. What is the current value of a share of Seneca common stock to an investor who require a 14% rate of return?

Hint:

• The dividend growth rate g(t) changes during the history.
• Dividend(t) = Dividend(t-1) * (1+g(t))
• The terminal value P4 = D5 / (r-g5)
• The cash flow for year 1-4, including both dividend and terminal value.
• The stock price is calculated as the sum of the present value of the cash flows from year 1-4.
  • price = PV(D1) + PV(D2) + PV(D3) + PV(D4 + P4)

YEAR	Uneven Growth Rate	Dividend	Terminal Price	Future Cash Flow	Discount Rate (A)	Current Price of Future Dividend (B)	Future Dividends and Terminal Value (C)
0		1.50			0.14		21.34
1	0.11	1.67		1.67
2	0.11	1.85		1.85
3	0.11	2.05		2.05
4	0.11	2.28	26.57	28.84
5	0.05	2.39
6	...	...

Question A:

XYZ-1: How much is the expected dividend for year 4?

Question B:

XYZ-2: How much is the expected dividend for year 5?

Question C:

XYZ-3: How much is the terminal price at year 4?

Hint: P(t) = D(t+1) / (r-g)

Question D:

XYZ-4: How much is the current price of the stock, calculated as the present value of future cash flow?

Answer 1

Given Do = $15 per share Growth Rate = g = For First 4 years = 11% = 0.11 From Shycor onwards - Sh=005 Required Rate of Return = = 14% = 0.14 Dividend Ą Expected your For Year 44 Dt = D(t-1) (1 + g (t)) Where, Dt = Dividend of Yeart g(t) = Growth Rate of Yeart Calculation Year DO DI Da 1.5 (1+0.11) 1.665()+0.11) 1.85 (1+0.11) 2.05 (1+0.11) Dividend $1.5 $1.665 $1.85 $2.05 $2.28 w D4 pecred Dividend for Year 4 = $2.28 8 Expected Dividend for Year 5 Ds =D4 (+ g(s) Where D4 = $2.28 (as calculated above A) gis = 0.05 ..Ds = 2.28 (1+0.05) - $ 2.389 1. Expected Dividend for Year 5 = $2.39

PAGE: DATE: o Terminal Price at Year 4. P(t) = D(t+1)/rg r-9 Where Do = $2.39 (As Calculated in B above) r = 0.14 9 = 0.0S. Pq = 2.39 0.14-0.05 - $26.56 Calculation of Current Price of Stock Calculation of Discounting Factor = 14 Where, 3 r= 14% = 0.14 n = no. of Year Year I Cash Flow Dividend = 1.67 Dividend = 1.85 Dividend =2.0.5 Dividend = 2.28 Terminal Value = 26.56 Discounting Factor @ 14% 0.8772 0.7695 0-6750 0.592) 0.5921 Present Value 1.46 -1.42 1.38 1.35 15.73 21. 34 4 Current Price of Stock = $21. 34