Question

Target is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock today if the required return is 13.7 percent

Answer 1

Answer: $15.55

Step-by-step explanation:

The price of the stock will be the sum of the present values of the dividends and the present value of the terminal value at year 2.

Present value Dividend 1 Present value of Dividend 2

= (3 * (1 - 10%)) / (1 + 13.7%) = (3 * (1 - 10%)²) / (1 + 13.7%)²

= $2.37467 = $1.879686162

Present value of terminal value.

The dividend will be constant forever so this is a perpetuity:

Terminal value = Dividend / Required return

= 2 / 13.7%

= $14.59854

Present value = 14.59854 / (1 + 13.7%)²

= $11.2924582814

Market value = 2.37467 + 1.879686162 + 11.2924582814

= $15.55