Oriole Corporation will pay dividends of $2.60, $2.95, and $3.40 in the next three years. After...
Oriole Corporation will pay dividends of $2.60, $2.95, and $3.40 in the next three years. After three years, the dividends are expected to grow at a constant rate of 3 percent per year. If the required rate of return is 13.0 percent, what is the current value of the Oriole common stock? (Round answer to 2 decimal places, e.g. 52.75.)
Homework Answers
| 1) Calculation of stock's current price: | ||||
| Year | Amount | PVF @13% | Present value | |
| 1 | 2.60 | 0.885 | 2.30 | |
| 2 | 2.95 | 0.783 | 2.31 | |
| 3 | 3.40 | 0.693 | 2.36 | |
| 3 | 35.02 | 0.693 | 24.27 | |
| Total | 31.24 | |||
| Current price is $31.24 | ||||
| Working: | ||||
| Calculation of dividend: | ||||
| Terminal value= Dividend(1+growth)/(return-growth) | ||||
| =3.40*(1+0.03)/(0.13-0.03) | ||||
| = 3.502/0.10= 35.02 | ||||
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