Question

You are considering investing in ICI. Suppose ICI currently paid $3 dividend and enjoying super growth and expected to pay 30% more in dividends each year for 3 years. After these three years the dividend growth rate is expected to be 2% per year forever. If the required return for ICI common stock is 11%, what is a share worth today?

Answer 1

Answer:

$67.06

Explanation:

first, we need to determine the price of ICI stock in 3 years:

stock price = dividend / (required rate of return - growth rate)

• dividend = $3 x 1.3 x 1.3 x 1.3 x 1.02 = $6.72
• required rate of return = 11%
• growth rate = 2%

stock price = $6.72 / (11% - 2%) = $74.70

now we discount the next three dividends plus the stock price:

current stock price = $3.90/1.11 + $5.07/1.11² + $6.591/1.11³ + $74.70/1.11³ = $3.51 + $4.11 + $4.82 + $54.62 = $67.06

Answer 2

Answer:

The share worth today is $67.06.

Explanation:

• we need to determine the price of ICI stock in 3 years:

Formula :

Stock Price = Dividend / (required rate of return - growth rate)

• Dividend = $3 x 1.3 x 1.3 x 1.3 x 1.02 = $6.72

• Required rate of return = 11%

• Growth rate = 2%

• Stock price = $6.72 / (11% - 2%) = $74.70  

Current Stock Price =$3.90/1.11 + $5.07/1.11² + $6.591/1.11³ + $74.70/1.11³

Current Stock Price = $3.51 + $4.11 + $4.82 + $54.62

Current Stock Price = $67.06

Therefore, the share worth of ICI is $67.06.

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