Answered

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 17 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $1.70 per share. What is the current value of one share of this stock if the required rate of return is 7.20 percent?

Answer :

Answer:

$67.66

Explanation:

The computation of current value of one share is shown below:-

Dividend 1 = $1.70 × (1 + 17%)

= $1.70 × 1.17

= $1.989

Dividend 2 = $1.989 × 1.17

= $2.32713

Dividend 3 = $2.32713 × 1.17

= $2.7227421

Dividend 4 = $2.7227421 × 1.17

= $3.18560826

Value after year 4 = (Dividend 4 × Growth rate) ÷ (Required return - Growth rate)

= ($3.18560826 × (1 + 3%)) ÷ (0.072 - 0.03)

= $3.28117651 ÷ 0.042

= $78.1232502

Current value of one share = $1.989 ÷ 1.072 + $2.32713 ÷ 1.072^2 + $2.7227421 ÷ 1.072^3 + $3.18560826 ÷ 1.072^4 + $78.1232502 ÷ 1.072^4

Where 1.072 = (1 + 7.20%)

= $1.855410448  + $2.025028194  + $2.21015204 + $2.412199524  + $59.15632166

= $67.65911186

or

= $67.66

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