Question

Swanton Industries is expected to pay a dividend of $10 per year for 10 years and then increase the dividend to $15 per share for every year thereafter. The required rate of return on this stock is 20 percent. What is the estimated stock price for Swanton?

Answer 1

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return)

=>

Value of stock = 10/1.2 + 10/1.2^2 + 10/1.2^3 + 10/1.2^4 + 10/1.2^5 + 10/1.2^6 + 10/1.2^7 + 10/1.2^8 + 10/1.2^9 + 10/1.2^10 + (15/0.2)/1.2^10

= 54.04