Question

Lawrence​ Industries' most recent annual dividend was ​$2.28 per share ​(D0=$2.28​), and the​ firm's required return is 13​%. Find the market value of​ Lawrence's shares when dividends are expected to grow at 8​% annually for 3​ years, followed by a 7​% constant annual growth rate in years 4 to infinity.

Answer 1

Value of stock = $41.75

Step-by-step explanation:

The price of a stock using the dividend valuation model is the present value of the the future dividend expected from the stock discounted at the required rate of return.

value of dividend from year 1 to 3

Year Present Value

1 2.28× 1.08^1 × 1.13^(1-) = 2.179

2 2.28× 1.08^2 × 1.13^(-2) = 2.083

3. 2.28 × 1.08^3 × 1.13^(-3)= 1.991

Present value of Dividend in Year 4 and beyond

This will be done in two steps

Step 1 :PV in year 3 terms

= Dividend in year 4× (1.06)/(0.1-0.06)

2.28 × 1.08^3 × 1.07/(0.13-0.07)= 51.220

step 2 : PV in year 0 terms =

PV in year 3 × 1.1^(-3)

=51.220 × 1.13^(-3)= 35.498

Value of stock = 2.179 +2.083 +1.991 + 35.498 = 41.75

Value of stock = $41.75