Question

Vinca Inc. has paid a dividend of $1.2 a share last year. Yesterday, the firm announced that the dividend will increase by 10 percent each year for the next three years, after which time the dividends will increase by 4 percent annually. The required return on this stock is 12 percent. What is the current value per share?

a. $16.31
b. $14.70
c. $20.76
d. $18.24

Answer 1

Answer:

option (d) $18.24

Explanation:

Data provided in the question:

Dividend paid last year = $1.2

Dividend growth rate for 3 years, g = 10%

After 3 years Dividend growth rate, g' = 4%

Required return, r = 12%

Now,

Present vale factor, PVF =  $\frac{1}{(1+i)^n)}$

Year       Dividend                      PVF @12%             Dividend × PVF

1            1.2(1+.10)= 1.32                0.89286                  1.1786

2            1.32(1+.10)= 1.452      0.79719                    1.1575

3            1.452(1+.10)= 1.5972      0.71178                     1.1369

3(Terminal value) 20.7636      0.71178                     14.7791

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Current share price ∑(Dividend × PVF )                  ≈     $18.24

Note:

Terminal value at year 3 = $\frac{D3(1+g')}{(r-g')}$

= $\frac{\ 1.5972(1+0.04)}{(0.12-0.04)}$

= $20.7636

Hence,

The correct answer is option (d) $18.24