Question

Please help me to find the dividens in the nearest penny, and also determin the value of a share of the stock using the dividen-discount model. Show all works please! Thank you!

7. Waddell and Reed (WDR) is expected to pay a dividend of $0.25 in the third quarter of 2019 (2019Q3), but the company is expecting rapid growth over the next year due to recent expansion to the west coast. The company's executives believe that 2019Q4's dividend wil be 20% higher. Further, they expect dividends to grow at a steady rate of 15% per quarter in 2020 before settling at 2% growth for 2021 and beyond. The executives hope this dividend growth will satisfy investors, who expect a 3% quarterly return on equity capital Assume that the first dividend will be paid in exactly one quarter. Fill out the following table of dividends. Round each dividend to the nearest penny. Then, determine the value of a share of WDR using the dividend-discount model. Quarter Expected Growth Expected Dividend 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 Beyond 20% 15% 15% 15% 15% 2% 2% 0.25

Answer 1

Here dividend paid in 2019Q3 will be regarded as D1.

The table is filled and the numbers are shown below:

	D1	D2	D3	D4	D5	D6	D7
Quarter	2019Q3	2019Q4	2020Q1	2020Q2	2020Q3	2020Q4	2021Q1	BEYOND
Expected growth (g)		20%	15%	15%	15%	15%	2%	2%
Expected dividend	0.2500	0.3000	0.3450	0.3968	0.4563	0.5247	0.5352

The table, after rounding it to the nearest penny, is shown below:

Quarter	2019Q3	2019Q4	2020Q1	2020Q2	2020Q3	2020Q4	2021Q1	BEYOND
Expected growth (g)		20%	15%	15%	15%	15%	2%	2%
Expected dividend	0.25	0.30	0.35	0.40	0.46	0.52	0.54

Now value of the stock = present value of (D1 to D7) + present value of dividends that will be paid in future after D7.

Value of dividends that will be paid after 2021Q1 = D8/(r-g) = (0.5352*(1.02))/(3% - 2%)

= $55.68

Thus stock value = 0.2500/(1.03) + 0.30/1.03^2 + 0.3450/1.03^3 + 0.3968/1.03^4 + 0.4563/1.03^5 + 0.5247/1.03^6 + 0.5352/1.03^7 + 55.68/1.03^7

= $58.14