Question

In mid-2018, some analysts recommended that General Electric (GE) suspend its dividend payments to preserve cash needed for investment. Suppose you expected GE to stop paying dividends for two years before resuming an annual dividend of $1.25 per share, paid 3 years from now, growing by 3.4% per year. If GE's equity cost of capital is 8.6%, estimate the value of GE's shares today. The price today is $ . (Round to the nearest cent.)

Answer 1

Price after 3 years is calculated using Dividend Discount Model at $24.86. This amount is further discounted for 3 years at the rate of equity cost of capital and thus price today is ascertained at $19.41

Details of calculation as follows:

A B C D E Formula Cell reference Values 2 Dividend at year 3 D3 Given $ 1.25 3 Growth rate of dividend per year & Given 3.4% 4 Next Dividend D4 D3*(1+g) E2*(1+E3) $ 1.29 5 Equity cost of capital r Given 8.6% 6 Price after 3 years P3= D4/(r-g) 7 Where r= Rate of return, gr growth rate of dividend and D4= Dividend for year 4 8 (r-g)= E5-E3 0.052 9 Price after 3 years P3 (D4/(r-g) E4/E8 $ 24.86 10 Current price POP3/(1+r)^3 E9/(1+E5)^3 $ 19.41 11