Question

Common stock value-Constant growth Personal Finance Problem Over the past 6 years, Elk County Telephone has paid the dividends shown in the following table, E. The firm's dividend per share in 2020 is expected to be $3.38. a. If you can earn 14% on similar-risk investments, what is the most you would be willing to pay per share in 2019, just after the $3.31 dividend? b. If you can earn only 11% on similar-risk investments, what is the most you would be willing to pay per share? c. Compare your findings in parts a and b, what is the impact of changing risk on share value?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B Year 2019 2018 2017 2016 2015 2014 Dividend per share $3.31 $3.25 $3.18 $3.12 $3.06 $3.00 Growth rate 1.85% 2.20% 1.92% 1.96% 2.00% Average Growth rate of dividend(g) 1.99% $3.38 12 a. Expected dividend 13 Required return 14% 15 $28.13 Stock Price in 2019 16 17 b. Expected dividend 18 Required return $3.38 11% Stock Price in 2019 $37.50 20 21 22 c. Impact of changing risk on share value: Share value increases by $9.36 24

Cell reference -

B C D Year 2019 2018 2017 2016 2015 2014 Dividend per share Growth rate 3.31 =C3/C4-1 3.25 1=C4/C5-1 3.18 =C5/C6-1 3.12 =C6/07-1 3.06 =C7/08-1 3 Average Growth rate of dividend(g) =AVERAGE(D3:07) 11 12 a. Expected dividend Required return 3.38 0.14 13 14 15 Stock Price in 2019 =C12/C13-010) 16 17 b. 18 Expected dividend Required return 3.38 0.11 Stock Price in 2019 =C17/(C18-C10) 19 20 21 22 c. Impact of changing risk on share value: Share value increases by $9.36 24

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