The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 13% per year for the next 6 years and then decreasing the growth rate to 3% per year forever after. The company just paid its annual dividend in the amount of $0.95 per share. What is the current value of one share if the required rate of return is 10%?
The current value of one share is computed as shown below:
= Dividend in year 1 / ( 1 + required return )1 + Dividend in year 2 / ( 1 + required return )2 + Dividend in year 3 / ( 1 + required return )3 + Dividend in year 4 / ( 1 + required return )4 + Dividend in year 5 / ( 1 + required return )5 + Dividend in year 6 / ( 1 + required return )6 + 1 / ( 1 + required return )6 [ ( Dividend in year 6 ( 1 + growth rate ) / ( required return - growth rate ) ]
= ($ 0.95 x 1.13) / 1.10 + ($ 0.95 x 1.132) / 1.102 + ($ 0.95 x 1.133) / 1.103 + ($ 0.95 x 1.134) / 1.104 + ($ 0.95 x 1.135) / 1.105 + ($ 0.95 x 1.136) / 1.106 + 1 / 1.106 [ ( $ 0.95 x 1.136 x 1.03 ) / ( 0.10 - 0.03 ) ]
= $ 1.0735 / 1.10 + $ 1.213055 / 1.102 + $ 1.37075215 / 1.103 + $ 1.54894993 / 1.104 + $ 1.75031342 / 1.105 + $ 1.977854165 / 1.106 + 1 / 1.106 ( $ 29.10271128 )
= $ 22.70 Approximately
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