Do = 2.55 gs = 25% (3yrs) &
Do = 2.55
gs = 25% (3yrs)
gn = 10%
ke = 15%
What is the max price you are willing to pay for clay corp?
Homework Answers
Price should be $ 81.10
| As per dividend discount model, current share price is the sum of present value of future dividends. | |||||||
| Step-1:Present value of dividends of next 3 years | |||||||
| Year | Dividend | Discount factor | Present value | ||||
| a | b | c=1.15^-a | d=b*c | ||||
| 1 | $ 3.19 | 0.869565217 | $ 2.77 | ||||
| 2 | $ 3.98 | 0.756143667 | $ 3.01 | ||||
| 3 | $ 4.98 | 0.657516232 | $ 3.27 | ||||
| Total | $ 9.06 | ||||||
| Step-2:Present value of dividends after year 3 | |||||||
| Present value | = | D3*(1+g)/(Ke-g)*DF3 | Where, | ||||
| = | $ 72.04 | D3 | = | $ 4.98 | |||
| g | = | 10% | |||||
| Ke | = | 15% | |||||
| DF3 | = | 0.657516232 | |||||
| Step-3:Sum of present value of future dividends | |||||||
| Sum | = | $ 9.06 | + | $ 72.04 | |||
| = | $ 81.10 | ||||||
| So, | |||||||
| Price of stock is | $ 81.10 |
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