Question

Eddy's Heating and Cooling has been successful in the last four years. Over these years. I paid common stock dividends of S400 in the first year. 54.20 in the second yeur54.41 in the third you and to most recent vidund was 5463 The company continue this grouth indefinitely. What is the value of the company's stock of the required rate of return is 128? Hound to the newest cont)

Answer 1

If the growth rate continues indefinitely,

Company's stock value(P₀) = D₀(1+g)/(ke - g)

D₀ = Current year's dividend

g = growth rate

ke = required return

So first find the growth rate

g = (current dividend/ initial dividend)^1/n - 1

n = current year - initial year

n = 4th year - 1st year = 3 years, so n = 3

=(4.63/4)^1/3 - 1

= 1.0499622057 -1

= 0.0499622057

= 4.99622057

= 5% ( rounded to nearest %)

OR another way to calculate growth rate =

(Current year dividend - Previous year dividend)/previous year

= (4.63 - 4.41)/4.41

=0.22/4.41

= 4.988662131

= 5% ( rounded to nearest %)

P₀ = 4.63(1+5%)/(12% - 5%)

= 4.8615/7%

= $69.45

The value of company's stock is $ 69.45 .