Question

Global Exporters recently announced that it will pay annual dividends of $1.10; $1.25, and $1.30 a share over the next three years, respectively. After that, the firm plans to increase its dividend by 2.5 percent annually. What is one share of this stock worth to you today if you require an 11 percent rate of return?

Answer 1

Answer:

$14.42

Explanation:

Please kindly check attachment for the step by step solution of the given problem.

Answer 2

Answer:

$13.28

Explanation:

Worth of the stock is the present value of all the cash flows associated with the stock. Dividend is the only cash flow that a stock holder receives against its investment in the stocks. We need to calculate the present values of all the dividend payments.

Formula for PV of dividend

PV of Dividend = Dividend x ( 1 + r )^-n

1st year

PV of Dividend = $1.10 x ( 1 + 11% )^-1 = $0.99

2nd year

PV of Dividend = $1.25 x ( 1 + 11% )^-2 = $1.01

3rd year

PV of Dividend = $1.30 x ( 1 + 11% )^-3 = $0.95

After three years the dividend will grow at a constant rate of 2.5%, so we will use the following formula to calculate the present value

PV of Dividend = [ $1.30 x ( 1 + 2.5% ) / ( 11% - 2.5% ) ] x [ ( 1 + 11% )^-4 ]

PV of Dividend = $10.33

Value of Stock = $0.99 + $1.01 + $0.95 + $10.33 = $13.28