Question

Consolidated Software​ doesn't currently pay any dividends but is expected to start doing so in 4 years. That​ is, Consolidated will go 3 more years without paying any dividends and then is expected to pay its first dividend​ (of ​$2.78 per​ share) in the fourth year. Once the company starts paying​ dividends, it's expected to continue to do so. The company is expected to have a dividend payout ratio of 41​% and to maintain a return on equity of 24​%. Based on the​ DVM, and given a required rate of return of 17​%, what is the maximum price you should be willing to pay for this stock​ today?

Answer 1

Growth rate=ROE*(1-payout ratio)

growth rate=24*(1-0.41)

growth rate = 14.16

	Required rate	17.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.0%	0		0	1.17	0
2	0	0.0%	0		0	1.369	0
3	0	0.0%	0		0	1.602	0
4	0	0.0%	2.78	111.748	114.528	1.874	61.11419
	Long term growth rate =	14.2%			Value of Stock =	Sum of discounted value =	61.11

Where
Discount factor=	(1+ required rate)^N
Discounted value=	total value/discount factor
Total value = Dividend	+ terminal value
Horizon value = year 4	Dividend *(1+long term gro	wth rate)/( required rate-long	term growth rate)