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 $1.20 per share, paid 4 years from now, growing by 3.2% per year. If GE's equity cost of capital is 8.7%, estimate the value of GE's shares today. The price today is $ - (Round to the nearest cent.)

Answer 1

The value of GE's share today is computed as shown below:

Price in year three is computed as shown below:

= Dividend in year 4 / ( required rate of return - growth rate )

= $ 1.20 / ( 0.087 - 0.032 )

= $ 21.81818182

Now in order to computed the current value, we shall discount the above computed value as follows:

= $ 21.81818182 / 1.087³

= $ 16.99 Approximately

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