Belmont Abbey (BA) has experienced prosperity in the last four years. The monks have been very...
Belmont Abbey (BA) has experienced prosperity in the last four years. The monks have been very generous: new dormitories, scholarships, and a new science building. They also paid common stock dividends: D1 $3 D2 $3.5 D3 $4 D4 $5 Given: The growth rate for the last few years is 3%. BA expects to continue with this distribution of dividends. What is the value of BA’s stock if the required rate of return is 9 percent?
Homework Answers
Value of Stock = Present Value of Dividends + Present Value of Price at Year 4
= $ 12.3290335299848 + $ 60.8064972830960
= $ 73.14
Hence the correct answer is $ 73.14
Note:
1. Present Value of Price at Year 4 = [Expected Dividend / ( Required return - growth rate) ] * Discounting Factor at Year 4
= [ $ 5 * 1.03 / ( 9% -3 %) ] *0.7084252110651960
= $ 60.8064972830960
2.
| Year | Dividend | Discounting Factor(9%) | |
| 1 | 3.00 | 0.9174311926605500 | 2.7522935779816500 |
| 2 | 3.50 | 0.8416799932665600 | 2.9458799764329600 |
| 3 | 4.00 | 0.7721834800610640 | 3.0887339202442600 |
| 4 | 5.00 | 0.7084252110651960 | 3.5421260553259800 |
| Present Value of Dividends | 12.329033529984800 | ||
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