Question

g A stock will issue a dividend of $20 one year from today. Dividends will shrink by 3% per year for the next two years after that, and then remain constant forever. Find the current price of one share of this stock, given an effective annual rate of 6%.

Answer 1

Current price = $341.943

Step-by-step explanation:

The Dividend Valuation Model is a technique used to value the worth of an asset. According to this model, the worth of an asset is the sum of the present values of its future cash flows discounted at the required rate of return.

PV dividend in year 1 = 20 × 1.03^(-1)= 19.41747573

PV of dividend in year 2 = 97%× 20 × 1,03^(-2)= 18.28636064

PV of dividend in year 3 = 97%× 97%× 20× 1.03^(-3) = 17.22113575

PV of dividend from year 4 and beyond

This will be done in two steps

PV (in year 3 terms

(97%× 97%× 20× 1.03^(-3))/0.06 =313.6333333

PV in year o terms

PV = A/r

A= 313.63, r = 6%

313.63× 1.03^(-3)= 287.0189291

Price of stock = 19.41 +18.28 + 17.221 + 17.221= 341.943

Current price = $341.943