Question

Wilmur Corporation has announced that it will pay its first annual stock dividend of $1.05 per share exactly two years from today. Analysts estimate that this dividend will grow by 1.5% per year in perpetuity and that the stock has a discount rate of 6%. What is the present value of a share of SETAB stock if you value it based on the discounted dividends investors expect to receive

Answer 1

Answer:

The price of the stock today is $22.012

Explanation:

The price of the share will be the value of its dividends discounted back to today's value. The constant growth model of the DDM approach will be used as the dividends will grow by a constant percentage in perpetuity. The formula for the constant growth model is,

P0 = D1 / r -g

As the company will pay no dividend in Year 1, D1 will be Zero. Wewill use D2 that will give us the value of stock one year from now. We will discount it back by 1+r to calculate the price today.

P0 = [1.05 / 0.06 - 0.015]  /  (1+0.06)

P0 = $22.012