Musica foods just paid a dividend of $1.20 a share. Management estimates the dividend will increase by 8 percent a year for the next five years. After that, the annual dividend growth rate is estimated at 3 percent. The required rate of return is 14 percent. What is the value of this stock today?
D1=(1.2*1.08)=1.296
D2=(1.296*1.08)=1.39968
D3=(1.39968*1.08)=1.5116544
D4=(1.5116544*1.08)=1.63258675
D5=(1.63258675*1.08)=1.76319369
Value after year 5=(D5*Growth rate)/(Required rate-Growth rate)
=(1.76319369*1.03)/(0.14-0.03)
=16.5099046
Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)
=1.296/1.14+1.39968/1.14^2+1.5116544/1.14^3+1.63258675/1.14^4+1.76319369/1.14^5+16.5099046/1.14^5
=$13.69(Approx).
Musica foods just paid a dividend of $1.20 a share. Management estimates the dividend will increase...
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