Question

ABC Company just paid annual dividend of $5 today. The dividend is expected to grow at 3% for the next 5 years, then it will grow at 5% in perpetuity. If stocks of similar company earn 9% annual return, what is the price of a share of ABC Company stock?

Answer 1

Particulars Dividend Dividend Growth Rate Year Ol Year 1 $5.00 $5.15 3% Year 21 Year 3 $5.30 $5.46 3% 3% Year 4 $5.63 3% Year 5 $5.80 3% 152.15 Terminal Value of Dividend Terminal Growth Rate Required Rate of Return 5% Total Dividend $5.15 $0.92 $5.30 $5.46 $5.63 $157.95 $0.84 $0.77 $0.71 $0.65 Discount Factor PV of Dividend $4.72 $4.46 $4.22 $3.99 $102.66 Price of Stock $120.05

Particulars Dividend Dividend Growth Rate =C2+1 =C3*(1+D4) =D2+1 =D3*(1+E4) 0.03 =E2+1 =E3*(1+F4) 0.03 =F2+1 =F3*(1+G4) 0.03 =G2+1 =G3*(1+H4) 0.03 0.03 =H3* (1+07)/(C8-C7 Terminal Value of Dividend Terminal Growth Rate Required Rate of Return 0.05 0.09 Total Dividend =D3+D6 =E3+E6 =F3+F6 =G3+G6 =H3+H6 Discount Factor =1/(1+$C$8)^D2 =1/(1+$C$8)^2 =1/(1+$C$8)^2 =1/(1+$C$8)^G2 =1/(1+$C$8)^H2 PV of Dividend =D10*D12 1=E10*E12 =F10*F12 =G10*G12 =H10*H12 Price of Stock =SUM(D14:H14)