Question

The Seneca Maintenance Company currently (that is, as of year 0) pays a common stock dividend of $1.50 per share. Dividends are expected to grow at a rate of 11 per- cent per year for the next 4 years and then to continue growing thereafter at a rate of 5 percent per year. What is the current value of a share of Seneca common stock to an investor who requires a 14 percent rate of return?

Answer 1

The current value of a share of Seneca common stock is $23.3337.

To calculate the present value of future dividends, you can use the dividend discount model (DDM).

The current value of a share of Seneca common stock to an investor who requires a 14 percent rate of return is $26.65.

Here is the calculation:

Year Dividend Present Value of Dividend

0 $1.50

1 $1.6650 $1.4722

2 $1.8423 $1.3145

3 $2.0370 $1.1724

4 $2.2544 $1.0452

5 $2.3798 $0.9286

6 $2.5168 $0.8227

7 $2.6625 $0.7281

8 $2.8170 $0.6446

9 $2.9799 $0.5720

10 $3.1514 $0.5099

The present value of the dividends after year 4 is $22.2885. The present value of the dividend in year 4 is $1.0452. Therefore, the current value of a share of Seneca common stock is $23.3337.