Question

Cascade Mining Company expects its earnings and dividends to increase by 8 percent per year over the next 6 years and then to remain relatively constant thereafter. The firm currently (that is, as of year 0) pays a dividend of $4.75 per share. Determine the value of a share of Cascade stock to an investor with a 11 percent required rate of return. Use Table II to answer the question. Round your answer to the nearest cent.

Answer 1

The value of share is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4 / (1 + required rate of return)⁴ + Dividend in year 5 / (1 + required rate of return)⁵ + Dividend in year 6 / (1 + required rate of return)⁶ + 1 / (1 + required rate of return)⁶ x [ (Dividend in year 7 / (required rate of return) ]

= ($ 4.75 x 1.08¹) / 1.11¹ + ($ 4.75 x 1.08²) / 1.11² + ($ 4.75 x 1.08³) / 1.11³ + ($ 4.75 x 1.08⁴) / 1.11⁴ + ($ 4.75 x 1.08⁵) / 1.11⁵ + ($ 4.75 x 1.08⁶) / 1.11⁶ + 1 / 1.11⁶ x [ ($ 4.75 x 1.08⁶) / 0.11 ]

= $ 5.13 / 1.11 + $ 5.5404 / 1.11² + $ 5.983632 / 1.11³ + $ 6.46232256 / 1.11⁴ + $ 6.979308365 / 1.11⁵ + $ 7.537653034 / 1.11⁶ + $ 68.52411849 / 1.11⁶

= $ 5.13 / 1.11 + $ 5.5404 / 1.11² + $ 5.983632 / 1.11³ + $ 6.46232256 / 1.11⁴ + $ 6.979308365 / 1.11⁵ + $ 76.06177152 / 1.11⁶

= $ 62.56 Approximately

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