Question

Hudson Corporation will pay a dividend of $3.28 per share next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

It is $49.20(ex-div)

Step-by-step explanation:

Mv of Share including next year unpaid dividend = D1/(ke-g)

=$3.28/(10%-3.75%)

=$3.28/0.0625

=$52.48

MV excluding unpaid dividend = $52.48-$3.28

=$49.20

The MV of the company using dividend valuation method has to be quoted ex-div(i.e excluding unpaid dividend).

It is assumed that the PV of the company is the aggregation of PV of streams of future cash inflow on the share such as dividends and capital gain returns.

Answer 2

The share price of the stock=$52.48

Step-by-step explanation:

We can use the required rate of return formula to calculate the share price, or the amount you will pay for the company's stock today, the formula is as shown:

RRR=(EDP/SP)+DGW

where;

RRR=required rate of return

EDP=expected dividend payment

SP=share price

DGW=dividend growth rate

In our case:

RRR=10%=10/100=0.1

EDP=$3.28

SP=unknown

DGW=3.75%=3.75/100=0.0375

replacing in the original expression;

0.1=(3.28/SP)+0.0375

(0.1-0.0375)=(3.28/SP)

0.0625=3.28/SP

SP=3.28/0.0625

The share price of the stock=$52.48