Question

Yesterday, company Delta announced the following dividend payment schedule: $20 for year one, $40 for year two and $35 for year 3. You expect to sell your shares at $85 at the end of year 3. How much will you pay for a 5 shares of company Delta if your required rate of return is 9%?

Answer 1

Step-1, The Current price per share

As per Dividend Discount Model, the current price of the share is the aggregate of the Present Value of the future dividend payments and the present value the stock price for the Year 3

Year	Cash flow ($)	Present Value factor at 9.00%	Present Value of cash flows ($)
1	20.00	0.91743	18.35
2	40.00	0.84168	33.67
3	35.00	0.77218	27.03
3	85.00	0.77218	65.64
\TOTAL			144.68

Step-2, The amount to paid for the 5 shares of the company

The amount to paid for the 5 shares of the company = Current price per share x 5 Shares

= $144.68 per share x 5 Shares

= $723.40

“Hence, the total amount to paid for the 5 shares of the company will be $723.40”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.