Question

Comfort Ice Cream has plans to pay decreasing annual dividends of $1.72, $1.6, and $1.46 over the next three years, respectively. After that, the firm will increase the dividend by 4.5 percent each year. What is the value of this stock today at a discount rate of 12.2 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Solution - Dividend for year I (D)= $1.72 Dividend for year 2 for year 2 (D2) = $1.6 Dividend for year 3 (D3) = $1.46 Constant growth rate after year 3 (g] =4.5% each year Discount Rate (A) = 12,2. Firstly, we will calculate horizon value of stock (P3), after which the growth rate is constant. P3 D3 (tg) 1 e-g $1.46 (1+ 4.5.1.) 12.24.-4.5.1.

11 $1.46 (1+0.045) 0.122-0.045 $1.46(1.045) 0.077 = $19.8142857 Now, we will calculate current value of stock by discounting Dividend from year I to 3 and horizon value (P3). Current value of Stock 3 Po = D2 + + (1+r)! (174)? D3+ Р. (1+ $1.72 (1+0.122) + $1.6 (1+0.122) 7 $ 1.46+ $19.8142857 (+0.122) $1.72 + $1.6 (1-122)2 + $ 21.2742857 (1.122)3 1.122

$1,53297683 + $ 1.27096698 + $15.061784 = $ 17.8657278 or $17.87 Value of stock today $17.87