Question

global tek plans on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 2.5 percent per year. the company just paid its annual dividend in the amount of $.20 per share. what is the current value of one share of this stock if the required rate of return is 17.4 percent?

Answer 1

To calculate the current value of a Global Tek stock share, future dividends must be forecasted at varying growth rates, and these amounts must be discounted back to the present using the required rate of return. This involves a dividend discount model with two stages, first involving a higher growth phase and then a perpetual lower growth phase.

Step-by-step explanation:

The question at hand involves calculating the current value of a share of stock for Global Tek considering a changing dividend growth rate and a required rate of return. To determine this value, one can use the Gordon Growth Model, which is a variant of the dividend discount model (DDM), while incorporating the phases of changing growth rates. The calculations consist of determining the future dividends during the high-growth phase and their present value, followed by the terminal value of the dividends growing at a perpetual lower rate from there on.

The steps are as follows: calculate the dividends for the next four years based on the 15 percent growth rate, discount them back to the present at the 17.4 percent required rate of return, and then calculate the present value of the terminal price, assuming dividends grow at 2.5 percent in perpetuity from the year five onwards. The sum of the present values of these dividends provides the current share value.