Answer:
The value of this stock today should be $6.22
Explanation:
The company will start paying dividends 2 years from today that is at t=2. The dividends received 2 years from today can be denoted as D2. The constant growth model of DDM will be used to calculate the price of this stock at t=2 as the growth rate in dividends is constant forever.
The price at t=2 will then be discounted back to its present value today to calculate the price of this stock today.
The price of this stock at t=2 will be,
P2 = D2 * (1+g) / (r - g)
P2 = 0.6 * (1+0.04) / (0.12 - 0.04)
P2 = $7.8
The value of this stock today should be,
P0 = 7.8 / (1+0.12)^2
P0 = $6.218 ROUNDED OFF TO $6.22
Answer:
Price of share = $ 0.6696
Explanation:
According to the dividend valuation model , the current price of a stock is the present value of the expected future dividends discounted at the required rate of return
This principle can be applied as follows:
Year 2 0.60× 1.12^(-2) = $0.04783
PV of year of year 3 onward
This will done in two steps:
Step 1
Calculate the PV of dividend in year 2 terms
= 0.60× 1.04 /(0.12-0.04) = $0.78
Step 2
Re-discount the PV (in year 2) to year 0
0.78 × 1.12 ^(-2) = 0.621811224
Price of share
=0.04783 +0.621811
=$ 0.6696
