Question

ABC Company is not expected to pay any dividends for the next 3 years. Beginning 4 years from today, investors expect to receive a dividend of $2 per share for 3 years and then a dividend of $3 per share for each of the next 4 years. Then dividends are expected to grow at 4% per year forever. If investors require a 15% return, what is the price per share? Do not use excel. Need to understand this writing out PVIF functions.  

Answer 1

Year	Dividend
1	D1=	$0
2	D2=	$0
3	D3=	$0
4	D4=	$2
5	D5=	$2
6	D6=	$2
7	D7=	$3
8	D8	$3
9	D9=	$3
10	D10	$3
11	D11	$3.12	(3*1.04)
12		$3.24	(3.12*1.04)
13		$3.37	(3.24*1.04)

P10=Price in year 10=D11/(R-g)=Present Value in year 10 of future cash flows from year 11 to perpetuity.

R=Required Return=15%=0.15

g= 4%=0.04

P10=3.12/(0.15-0.04)=$28.36

Current Price Per Share =P0=Present Value of future cash flows

Present Value (PV) of Cash Flow:

(Cash Flow)/((1+i)^N)

i=Discount Rate=Required rate of return=15%=0.15

N=Year of Cash Flow

Cash Flows and Present value of cash flows are given below:

N		A	PV=A/(1.15^N)
Year		Cash Flow
1	D1	$0	$0
2	D2	$0	$0
3	D3	$0	$0
4	D4	$2	1.143506491	(2/(1.15^4)
5	D5	$2	0.994353471	(2/(1.15^5)
6	D6	$2	0.864655192	(2/(1.15^6)
7	D7	$3	1.12781112	(3/(1.15^7)
8	D8	$3	0.980705322	(3/(1.15^8)
9	D9	$3	0.852787236	(3/(1.15^9)
10	D10	$3	0.741554118	(3/(1.15^10)
10	P10	$28.36	7.010158266	(28.36/1.15^10)
		SUM	$13.72

Price Per Share =Sum of PV of future cash flows=$13.72

Current Price per share=P0=

$13.72