Question

16. MGM Resorts Incorporated is expected to grow at an exceptionally high rate over the next 2 years due to the success of Macau casino. Growth in dividends is expected to be 20% for the next 2 years before reverted back to a constant rate of 4% that is expected to continue indefinitely. If MGM Resorts’ paid a $1.20 dividend yesterday (D0=$1.20) and the stock is valued according to a required rate of return of 14%, what is the value of a share of MGM Resorts stock today?

(a) $14.72 (b) $16.42 (c) $17.97 (d) $20.56 (e) $19.88

Answer 1

Step-1, Dividend for the next 2 years

Dividend per share in Year 0 (D0) = $1.20 per share

Dividend per share in Year 1 (D1) = $1.4400 per share [$1.20 x 120%]

Dividend per share in Year 2 (D2) = $1.7280 per share [$1.4400 x 120%]

Step-2, Share Price in Year 2

Dividend Growth Rate after Year 2 (g) = 4.00% per year

Required Rate of Return (Ke) = 14.00%

Share Price in Year 2 (P2) = D2(1 + g) / (Ke – g)

= $1.7280(1 + 0.04) / (0.14 – 0.04)

= $1.7971 / 0.10

= $17.97 per share

Step-3, The Current Stock Price

As per Dividend Discount Model, Current Stock Price the aggregate of the Present Value of the future dividend payments and the present value the share price in year 2

Year	Cash flow ($)	Present Value Factor (PVF) at 14.00%	Present Value of cash flows ($) [Cash flows x PVF]
1	1.4400	0.877193	1.26
2	1.7280	0.769468	1.33
2	17.97	0.769468	13.83
TOTAL	16.42

“Hence, the value of a share of MGM Resorts stock today will be (b). $16.42”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.