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:
Question
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:
Solution
To calculate the value of the stock in 4 years, we can use the dividend discount model (DDM) formula. The DDM formula is:
Value of Stock = Dividend / (Required Return - Dividend Growth Rate)
Given that the company recently paid an annual dividend of $10 and will implement a 5% yearly dividend growth policy, we can calculate the future dividends as follows:
Year 1 Dividend = 10.50 Year 2 Dividend = 11.03 Year 3 Dividend = 11.58 Year 4 Dividend = 12.16
Now, we can substitute these values into the DDM formula. The required return is 12% or 0.12.
Value of Stock in 4 years = $12.16 / (0.12 - 0.05)
Simplifying the equation:
Value of Stock in 4 years = $12.16 / 0.07
Value of Stock in 4 years = $173.71
Therefore, the value of this stock in 4 years is estimated to be $173.71.
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