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 15 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $1.50 per share. What is the current value of one share of this stock if the required rate of return is 7.00 percent?

$78.09

$92.45

$90.95

$76.59

$69.38

Solution

D1=(1.5*1.15)=$1.725

D2=(1.725*1.15)=$1.98375

D3=(1.98375*1.15)=$2.2813125

D4=(2.2813125*1.15)=$2.623509375

Value after year 4=(D4*Growth rate)/(Required return-Growth rate)

=(2.623509375*1.04)/(0.07-0.04)=$90.948325

Hence current value=Future dividends*Present value of discounting factor(7%,time period)

=$1.725/1.07+$1.98375/1.07^2+$2.2813125/1.07^3+$2.623509375/1.07^4+$90.948325/1.07^4

which is equal to

=$76.59(Approx).