Question

1) the expected return for XYZ stock is 9.5 percent: 2) the dividend is expected to be 54.38 in one year, 56.33 in two years, 50 in three years, and 53.81 in four years, and 3) after the dividend is paid in four years, the dividend is expected to begin growing by 4.5 percent a year forever, then what is the current price of one share of the stod a. An amountless than $67.10 b. An amount between $67.10 and just less than $68.10 Oc An amount between $68.10 and just less than 569.10 d. An amount between $69.10 and just less than 570.10 e. An amount equal to or greater than $70.10

Answer 1

A B с D E 5 o 14 2 Expected Return 9.50% 3 Dividend - year 1 $4.38 4 Dividend - year 2 $6.33 Given in Dividend - year 3 $0.00 question 6 Dividend - year 4 $3.81 7 Dividend Growth (after year 4) 4.50% 9 Step 1 Calculation of Perpetual Dividend at the end of year 4 10 Perpetual Dividend end of year 4 = Dividend at year 5/(expected 11 return - growth rate) 12 Dividend at year 5 $3.98 Perpetual Dividend at the end of 13 year 4 $79.63 15 Step 2 Calculation of Current Price of one share 16 Current price per share = Present Value of all future dividends (as per 17 Dividend Discount Model) Discount Discounted Dividend Factor at Years Dividend per Per Share expected share 18 return 19 1 $4.38 0.9132 $4.00 20 2 $6.33 0.8340 $5.28 21 3 $0.00 0.7617 $0.00 22 4 $3.81 0.6956 $2.65 23 Perpetual $79.63 0.6956 $55.39 24 Current Price per share = $67.32

Current Price per share = $67.32

Answer is option b. An amount between $67.10 and just less than $68.10

Workings:

A B с E B 14 2 Expected Return 0.095 Dividend - year 1 4.38 4 Dividend - year 2 6.33 Given in 5 Dividend - year 3 0 question 6 Dividend - year 4 3.81 Dividend Growth (after year 4) 0.045 9 Step 1 Calculation of Perpetual Dividend at the end of year 4 10 Perpetual Dividend end of year 4 = Dividend at year 5/(expected return- 11 growth rate) 12 Dividend at year 5 =C6*(1+C7) Perpetual Dividend at the end 13 of year 4 =C12/(C2-C7) 15 Step 2 Calculation of Current Price of one share 16 Current price per share = Present Value of all future dividends (as per Dividend 17 Discount Model) Discount Factor Discounted Dividend Per Years at expected Dividend per Share return share 18 19 1 =C3 =1/(1+$C$2)^B19 =C19*D19 20 =C4 =1/(1+$C$2)^B20 =C20*D20 21 3 =C5 =1/(1+$C$2)^B21 =C21*D21 22 =C6 =1/(1+$C$2)^B22 =C22*D22 23 Perpetual =C13 =1/(1+$C$2) B22 =C23*D23 24 Current Price per share = =SUM(E19:E23) 2 4