Question

West Side Co. is expecting the following dividends to be paid over the next 5 years: $3, $4, $5, $6, $7. Afterwards, the company pledges to maintain a constant growth rate of 2%, forever. If the required rate of return is 9%, calculate the current share price. (Round to 2 decimals)

Answer 1

$85.07

Step-by-step explanation:

The computation of the current share price is shown below:

Year Dividend Terminal value Total cash flow PVIF at 9% Present value

1 $3.00 $3.00 0.9174 $2.75

2 $4.00 $4.00 0.8417 $3.37

3 $5.00 $5.00 0.7722 $3.86

4 $6.00 $6.00 0.7084 $4.25

5 $7.00 $102.00 $109.00 0.6499 $70.84

$85.07

The terminal value is

= 7 × 102% ÷ (9%-2%)