Problem

A firm does not pay a dividend. It is expected to pay its first dividend of \$0.34 per share in three years. This dividend will grow at 7 percent indefinitely. Use an 8 percent discount rate. Compute the value of this stock. (Round your answer to 2 decimal places.)

Solution

Step 1 :Calculate the present value of the first dividend using the formula \( PV = \frac{D}{{(1 + r)^t}} \) where \( D \) is the dividend, \( r \) is the discount rate, and \( t \) is the time until the first dividend

Step 2 :Substitute the given values into the formula: \( PV = \frac{0.34}{{(1 + 0.08)^3}} \)

Step 3 :Calculate the present value of the first dividend: \( PV = \frac{0.34}{{(1.08)^3}} \)

Step 4 :Find the present value of the first dividend: \( PV = 0.2699029619468577 \)

Step 5 :Use the Gordon Growth Model to calculate the value of the stock: \( P = \frac{D}{{r - g}} \) where \( P \) is the price of the stock, \( D \) is the expected dividend one year from now, \( r \) is the discount rate, and \( g \) is the growth rate

Step 6 :Substitute the values into the Gordon Growth Model: \( P = \frac{0.34 \times (1 + 0.07)}{{0.08 - 0.07}} \)

Step 7 :Calculate the value of the stock: \( P = \frac{0.34 \times 1.07}{{0.01}} \)

Step 8 :Find the value of the stock: \( P = 26.99 \)

Step 9 :The value of the stock is \(\boxed{26.99}\)

From Solvely APP
Source: https://solvelyapp.com/problems/mGrzgV2oiF/

Get free Solvely APP to solve your own problems!

solvely Solvely
Download