Answer:
Value of the stock today=18.51
Explanation:
Price of the stock today = [tex]\frac{D3}{(1+ke)^3}+\frac{D4}{(1+ke)^4}+\frac{D5}{(1+ke)^5}+\frac{D6}{(1+ke)^6}+\frac{P6}{(1+ke)^6}[/tex].
where and P6= [tex]\frac{D7}{ke-g}[/tex]
Estimate of the stock's current price = [tex]\frac{0.75}{(1+0.14)^3}+\frac{0.75(1.65)}{(1+0.14)^4}+\frac{0.75(1.65)^2}{(1+0.14)^5}+\frac{0.75(1.65)^2(1.07)}{(1+0.14)^6}+\frac{0.75(1.65)^2(1.07)^2}{(0.14-0.07)(1.14)^6}[/tex] = 18.51
Answer:
The answer is $18.52
Explanation:
The dividend growth model is used to determine if a company's stock is undervalued or overvalued given the expected growth rate of the company. This valuation model calculates the value of the stock assuming the dividend growth is stable in perpetuity or at different rate during a specified period. The multi stage dividend growth model is useful in this case because the dividend growth rate is not uniform across all periods. The computation is done sequentially and in stages.
The first stage entails computing the expected dividend values, where the the growth rate is 65% in year 4 and 5 then 7% thereafter.
The second stage involves computing the present values of the values in the first stage using the required rate of return given as 14%
In the third stage, the dividend in perpetuity is computed so as to calculate the anticipated price of the stock in future, given the stable dividend growth. Lastly, the present value of the stock is computed by adding up all the present values of the projected dividend values calculated.
Please see the attached document for these calculations in a tabular format.
Present value of stock = 0.506 + 0.733+1.0605+16.212 = 18.516
