CL bookstore just paid a dividend of D0 = $1.35. Analysts expect the company’s dividend togrow by 30% this year, by 10% in year 2, and a constant rate of 5% in year 3 and thereafter. Therequired return on this low-risk stock is 9.00%. What is the best estimate of the stock’s currentmarket value?
Question
CL bookstore just paid a dividend of D0 = $1.35. Analysts expect the company’s dividend togrow by 30% this year, by 10% in year 2, and a constant rate of 5% in year 3 and thereafter. Therequired return on this low-risk stock is 9.00%. What is the best estimate of the stock’s currentmarket value?
Solution
To estimate the stock's current market value, we need to calculate the present value of all future dividends. Here's how to do it:
-
Calculate the dividends for the first three years:
- For the first year, the dividend (D1) is 1.755.
- For the second year, the dividend (D2) is 1.9305.
- For the third year and thereafter, the dividend (D3) grows at a constant rate of 5%. So, the dividend for the third year is 2.027025.
-
Calculate the present value of the dividends for the first two years:
- The present value of the first year's dividend is D1 / (1 + r) = 1.61.
- The present value of the second year's dividend is D2 / (1 + r)^2 = 1.62.
-
Calculate the present value of the dividends for the third year and thereafter. This is a perpetuity that starts in year 3, so we use the formula for the present value of a growing perpetuity: D3 / (r - g) / (1 + r)^2 = 50.68.
-
Add up the present values of the dividends to get the current market value of the stock: 1.62 + 53.91.
So, the best estimate of the stock's current market value is $53.91.
Similar Questions
The Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?
The CFO of a publicly traded company is expecting to pay a dividend next year of $1.25 and projecting that the price of the company’s stock will be $45 in 1 year. The CFO has determined that the required rate of return for the company is 10%. Based on the data available, what is the value of one share of stock today?
Kiffer SARL just paid a dividend of €0.85 on its stock.They expect dividends to grow at a rate of 8% in the next three years and 5% per year thereafter.Given a required rate of return of 15%, what is the current value of the company's common stock?€8.28€9.64€10.41€11.24€12.41
A company has been paying a $0.68 dividend and as it faces no growth opportunities it is expected that the dividend will not change in the future. If investors require a 24.98% return for this company, what is the share value. (Please round your answer to the nearest cent but exclude the $ sign when typing your answer.)
company recently paid an annual dividend of $10. Starting next year, it will implement a 5% yearly dividend growth policy. Investors require a 12% return. The value of this stock in 4 years can be calculated as follows:
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.