Question

Bell Weather Industries just paid a $3.00 per share dividend. The company is planning on increasing its annual dividend by 10% a year for two years and then the annual growth rate will be 5% per year thereafter. What is the current value of one share of stock if the required rate of return is 8%. Show all work.

Answer 1

DATE PAGE Calculation of Current Value of Share I Current Value of share is the present Value of all future Cast Irflow's { Dividend and Value } discountary I Using Appropriate discount rate. Greven 10o) Dividend Just Paid = $3 - Geraueth Rate = 10% for 2 years Dividend at year I Dox lt Graueth Rate ول 3 .l = = x lt 3:30 Dividend et Year 2 - Dividend x (1 + Gensweth Rate) o at Year 3.30x (1+.1) 3.63 Now Calculation of Salue at year a ( Using gardams Growth Model Recquired Rate of Return = 8% - Geraueth Rate = st.) Value at . Diuidend at leon 2 x (1+ Goroweth Rota) Recquired Rate - Graueth Rate of Return Greuen Recquir Year 2

Value at Year 2 3.63 •08 x (lt.os) - .05 Now - 127.05 Current Value of Stock PV = [1 + Cashflows Recquired Rate of Return / وهو 1 . 23 )) ( 3.63 z (17:08 1 Year Cashflow Present Value (Dividend @ 8%. I 3.30 2 3.63 3.1L 2 127.05 108.92 (value at Year? Present Value = 115.08 1 127.05 ) C14.083 so Current Value of Share is 115.08