Question

New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent?

Answer 1

= $8.50

Step-by-step explanation:

First, calculate the dividend per year;

D1 = 0.55

D2= 0.80

D3= 1.10

D4= D3(1+g); 1.10(1.05)= 1.155

Next, find the PV of each dividend given a rate of 18%

PV (D1) =0.55 / (1.16) = 0.4741

PV (D2) = 0.80 / (1.16^2) = 0.5945

PV (D3) = 1.10 / (1.16^3) = 0.7047

PV(D4 onwards) =
`((1.155)/(0.16-0.05) )/(1.16^(3) )` = 6.7269

Next, sum up the PVs to calculate the price;

=0.4741 + 0.5945 + 0.7047 + 6.7269

= 8.50

Therefore, the current value of this stock is $8.50