Question

7. The stock of Top of the Muffin currently pays a dividend of $11.40. The dividend is expected to grow by 20% per year for the next three years. In year 4 it will increase by $6.50 over the previous year, and after that point it will grow at 3% per year for the foreseeable future. If you require a 10.7% return for investing in this stock, what is a share of the stock worth to you today

Answer 1

= $291.09

Step-by-step explanation:

PV of dividend ($)

Year 1 11.40 × 1.2× 1.107^(-1) = 12.357

Year 2 11.40 × 1.2^2 × 1.107^(-2)= 13.395

Year 3 11.40 × 1.2^3 × 1.107^(-3)= 14.521

Year 4 ( ( 11.40 × 1.2^3) + 6.50 ) × 1.107^(-4) = 17.446

Year 5 and after

This will be done in two steps:

Step 1

PV( in year 4 terms)

=( ( 11.40 × 1.2^3) + 6.50 ) × 1.107 )/ 0.107 - 0.03

=$350.456

Step 2

PV (in year 0 term)

=350.4568312× 1,107^(-4)

= 233.369

The worth of the stock

= 12.357 + 13.395 + 14.521 + 17.446 + 233.369

= $291.09