Question

American Express trades on the New York Stock Exchange under the ticker symbol AXP. In 2016, AXP was paying a dividend of $.80 and analysts forecasted five-year growth rates of 10.54% for AXP and 13.21% for the financial services industry. Assume the growth rate for the financial services industry will remain constant. Then, assuming AXP's growth rate will revert to the industry average after five years, what value would we place on AXP, if we use a discount rate of 15%

Answer 1

Answer:

The current value placed on AXP is $ 45.08

Explanation:

Dividend currently paying = $ 0.80

Growth rate up to 5 years = 10.54%

Expected dividend for 1st year = $0.80 × 1.1054 = $0.88

Year       Dividend amount         Present Value at 15%

0                        0.8                                

1                       0.88                             0.77

2                      0.98                              0.74

3                       1.08                             0.71

4                       1.19                              0.68

5                       1.32                             0.66

Growth rate = 13.21% from 6th year and onward

Expected dividend for 6th year = $1.32 × 1.1321 = $1.49

Value of the AXP at 5th year with constant growth at 13.21%

= $1.49 ÷ (0.15 - 0.1321)

= $83.51

Value of the AXP currently = P.V. of dividend payable in first 5 years + Present Value at 5th year at 15%

= $0.77 + $ 0.74 + $ 0.71 + $ 0.68 + $0.66 + ($83.51 × 0.4971 )

= $ 45.08