Question

Universal Laser just paid a dividend of $3.40 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and then a return of 9 percent thereafter. What is the current share price for the stock?

Answer 1

Total Value of stock today = $76.76

Step-by-step explanation:

B G Dividend Cf P NF Discounting factor NF*Df

1 5.00% 3.570 3.57000 0.884956 3.15929

2 5.00% 3.7485 3.74850 0.783147 2.93563

3 5.00% 3.935925 3.93593 0.693050 2.72779

4 5.00% 4.13272125 4.13272 0.624370 2.58035

5 5.00% 4.33935731 4.33936 0.562495 2.44087

6 5.00% 4.55632518 119.60 124.15986 0.506752 62.91830

Total Value of stock today = $76.76

Workings

Price of stock* at end of year 6 = Dividend in year 6 x (1+Growth rate) / (Required rate-Growth rate)

Price of stock* at end of year 6 = 4.55632518 x (1+5%) / (9%-5%)

Price of stock* at end of year 6 = 119.603536

b = Year , g = Growth, dcf = Dividend Cash flow, p = Price of stock* , Nf = Net cash inflow , Discounting factor = Df, Present value = Nf*Df