Question

Alpha Industries is going to pay $.35, $.50, and $.80 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth today at a discount rate of 13.45 percent?

Answer 1

The stock is worth $7.61 today.

Step-by-step explanation:

The stock's todays worth or value can be calculated using the DDM approach whereby all the expected future dividends are discount back to present value. The terminal value will be calcualted where the stock's dividend growth becomes zero and will be discounted back too.

The Price or worth of the stock today is,

• P0 or V = 0.35 / (1.1345) + 0.5 / (1.1345)² + 0.8 / (1.1345)³ + (1.25/0.1345)/(1.1345)³

P0 or V = $7.609 rounded off to $7.61