Question

MMC expects to pay its first dividend at the end of the year. The first dividend is expected to be $0.25 and the second $1.15. Then, dividends are expected to grow at 3% thereafter. Given a required return of 10%, what should the value of the stock be today?

Answer 1

value of stock today = $15.16.

working:

first let us know the terminal value of stock at the end of year 2:

dividend of year 2 (1+ growth rate) / (required return - growth rate)

=>$1.15*(1.03) / (0.10-0.03)

=>1.1845/0.07

=>$16.9214286.

now,

Present value factor = 1 /(1+r)^n

r=0.10.

n=1,2.

year	cash flow	PV factor	cash flow * PV factor
1	0.25	1/(1.10)^1=>0.90909	0.2272725
2	1.15	1/(1.10)^2=>0.82645	0.9504175
2	16.9214286 (terminal value as calculated above)	1/(1.10)^2=>0.82645	13.9847147
		Total	$15.16