Question

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.47 a share. The following dividends will be $.52, $.67, and $.97 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.3 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 14 percent?

Answer 1

Value of Stock is $6.68

Step-by-step explanation:

We need to calculate the present value of each dividend payment to arrive at the value of stock.

Number Dividend PV factor PV of Dividend

First $0.47 (1+14%)^-1 = 0.8772 $0.41

Second $0.52 (1+14%)^-2 = 0.7695 $0.40

Third $0.67 (1+14%)^-3 = 0.6750 $0.45

Forth $0.97 (1+14%)^-4 = 0.5921 $0.57

*Perpetuity$9.35 (1+14%)^-5 = 0.5194 $4.85

Total $6.68

* Perpetuity

After 4 year the dividend will be grow at a constant rate. So, it will be considered as the perpetuity and it value at year 5 will be calculated as follow

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

As per given data

Dividend = $0.97 x 1.033 = $1

Growth rate = 3.3%

Discount rate = 14%

Formula to calculate the value of stock

Price = Dividend / ( Rate or return - growth rate )

Price = $1 / ( 14% - 3.3% )

Price = $9.35