Question

Peterson Packaging Inc. does not currently pay dividends. The company will start with a $1.00 dividend at the end of year three and grow it by 9% for each of the next six years. After six years of growth, it will fix its dividend at $1.84 forever. If you want a 15% return on this stock, what should you pay today given this future dividend stream? but the ses parties to analyse the end you to be even the man se yon la sua forma, a bere If you want a 15% return on this stock, what should you pay today given this future dividend stream?

Answer 1

Value of stock = present value of dividends from end of year 3 to year 9 + present value of terminal value at end of year 9

terminal value at end of year 9 = perpetual dividend / required return

terminal value at end of year 9 = $1.84 / 15% = $12.27

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

The value of stock today = $7.43

B PV of Terminal Value Terminal PV of 1 Year Dividend Value Dividend 3 $ 1.00 $ 0.66 4 $ 1.09 $ 0.62 5 $ 1.19 $ 0.59 6 $ 1.30 $ 0.56 7 $ 1.41 $ 0.53 8 $ 1.54 $ 0.50 9 $ 1.68 $ 12.27 $ 0.48 Value of stock $ 7.43 $ 3.49