miller juice, Inc just paid a $3 dividend. The company is expected to pay a $3.50...
miller juice, Inc just paid a $3 dividend. The company is expected to pay a $3.50 dividend nest year and a $4 dividend in two years. After that, dividends are expected to grow 5% forever. If investors require a return if 12% on the investment what should Miller juice stock sell for today?
Homework Answers
| we have to use dividend discount model to compute the price of stock today | ||||||||
| Price today = Present value of the future cash flow = PV of dividend + PV of terminal value | ||||||||
| i | ii | iii | iv=ii+iii | v | vi=v*iv | |||
| Year | Dividend | Terminal value | Total cash flow | PVIF @ 12% | Present value | |||
| 1 | 3.5 | 3.5 | 0.892857 | 3.13 | ||||
| 2 | 4 | 60 | 64 | 0.797194 | 51.02 | |||
| 54.15 | ||||||||
| Terminal value = Dividend in year 3/(required rate - growth rate) | ||||||||
| =4*105%/(12%-5%) | ||||||||
| 60 | ||||||||
| therefore price today = | 54.15 | |||||||
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