Value of stock is $ 14.75
As per dividend discount method, current share price is the present value of future dividends. | ||||||||
Step-1:Present value of dividend of non-constant growth years | ||||||||
Year | Dividend | Discount factor | Present value | |||||
a | b | c=1.1412^-a | d=b*c | |||||
1 | $ 1.24 | 0.8763 | $ 1.09 | |||||
2 | $ 1.52 | 0.7679 | $ 1.16 | |||||
Total | $ 2.25 | |||||||
Working; | ||||||||
Dividend of Year : | ||||||||
1 | = | $ 1.02 | * | 1.2189 | = | $ 1.24 | ||
2 | = | $ 1.24 | * | 1.2189 | = | $ 1.52 | ||
Step-2:Calculation of terminal value of dividend at the end of non-constant growth years | ||||||||
Terminal value | = | D3*(1+g)/(Ke-g)*DF3 | Where, | |||||
= | $ 12.50 | D2(Dividend of year 2) | = | $ 1.52 | ||||
g (Growth rate in dividend) | = | 4.40% | ||||||
2 | = | 14.12% | ||||||
DF2 (Discount factor of year 2) | = | 0.7679 | ||||||
Step-3:Sum of present value of future dividends | ||||||||
Sum of present value of future dividends | = | $ 2.25 | + | $ 12.50 | ||||
= | $ 14.75 | |||||||
So, current share price is | $ 14.75 |
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