Peterson Packaging Inc. does not currently pay dividends. The company will start with a $0.60 dividend...
Peterson Packaging Inc. does not currently pay dividends. The company will start with a $0.60 dividend at the end of year three and grow it by 10% for each of the next six years. After six years of growth, it will fix its dividend at $1.18 forever. If you want a 14% return on this stock, what should you pay today given this future dividend stream?
Homework Answers
| As per dividend discount model, current share price is the sum of present value of future dividends. | ||||
| Step-1:Present value of dividends of next 9 years | ||||
| Year | Dividend | Discount factor | Present value | |
| a | b | c=1.14^-a | d=b*c | |
| 3 | $ 0.60 | 0.674971516 | $ 0.40 | |
| 4 | $ 0.66 | 0.592080277 | $ 0.39 | |
| 5 | $ 0.73 | 0.519368664 | $ 0.38 | |
| 6 | $ 0.80 | 0.455586548 | $ 0.36 | |
| 7 | $ 0.88 | 0.399637323 | $ 0.35 | |
| 8 | $ 0.97 | 0.350559055 | $ 0.34 | |
| 9 | $ 1.06 | 0.307507943 | $ 0.33 | |
| Total | $ 2.55 | |||
| Step-2:Present value of dividends after year 9 | ||||
| Present value | = | (D9/Ke)*DF9 | ||
| = | $ 3.25 | |||
| Where, | ||||
| D9 | = | $ 1.06 | ||
| Ke | = | 17% | ||
| DF9 | = | 0.519368664 | ||
| Step-3:Sum of present value of future dividends | ||||
| Sum | = | $ 2.55 | + | $ 3.25 |
| = | $ 5.80 | |||
| So, | ||||
| Price of stock is | $ 5.80 |
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