Question

Red Sun Rising just paid a dividend of $2.07 per share. The company said that it will increase the dividend by 15 percent and 10 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.3 percent. If the required return is 10.3 percent, what is the stock price today?

Answer 1

$36.07

Step-by-step explanation:

Given:

Dividend paid = $2.07 per share

Increase in dividend = 15%

Duration = 10 years

Expected growth in annual dividend = 3.3% = 0.033

Required return = 10.3% = 0.103

Now,

D1 = $2.07 × (1 + 0.15)

= $2.3805

D2 = $2.3805 × ( 1 + 0.10)

= $2.61855

Value after year 2 =
`\frac{D2*\textup{(1+Growth rate)}}{\textup{(Required return-Growth rate)}}`

=
`\frac{2.61855*\textup{(1 + 0.033)}}{\textup{(0.103-0.033)}}`

= $38.642

Hence,

Current price = Future dividends × PVAF(10.3%,time period)

=
`(2.3805)/(1+0.103)+(2.61855)/((1+0.103)^2)+(38.642)/((1+0.103)^2)`

= $36.07