The Bell Weather Co is a new firm in a rapidly growing indus

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 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 $1.80 per share. What is the current value of one share of this stock if the required rate of return is 7.30 percent?

$72.25

$85.39

$83.59

$74.05

$63.06

Solution

Year 1 dividend = 1.80 * 1.18 = 2.124

Year 2 dividend = 2.124 * 1.18 = 2.50632

year 3 dividend = 2.50632 * 1.18 = 2.957458

Year 4 dividend = 2.957458 * 1.18 = 3.4898

Year 5 dividend = 3.4898 * 1.03 = 3.594494

Present value at year 4 = D1 / K - G

Present value at year 4 = 3.594494 / 0.073 - 0.03

Present value at year 4 = $83.592884

Present value of 83.592884 = 83.592884 / ( 1 + 0.073)⁴

Present value = 63.062389

Present value of year 4 dividend = 3.4898 / ( 1 + 0.073)⁴

Present value of year 4 dividend = 2.632702

Present value of year 3 dividend = 2.957458 / ( 1 + 0.073)³

Present value of year 3 dividend = 2.393974

Present value of year 2 dividend = 2.50632 / ( 1 + 0.073)²

Present value of year 2 dividend = 2.176893

Present value of year 1 dividend = 2.124 / ( 1 + 0.073)

Present value of year 1 dividend = 1.979497

Curretnt value of stock = 1.979497 + 2.176893 + 2.393974 + 2.632702 + 63.062389

Curretnt value of stock = $72.25