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  3. 1. rrr co. just paid a dividend of $1.15 per share

1. RRR Co. just paid a dividend of $1.15 per share. The dividend is expected to...

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Finance

1. RRR Co. just paid a dividend of $1.15 per share. The dividendis expected to grow by 40% next year, 20% in both Years 2 & 3,10% in Year 4, and then grow at a constant rate of 4% thereafter.The required rate of return is 8.5%. Compute the selling price ofthe stock.

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As per dividend discount model, current price of stock is the present value of future dividends.
Step-1:Present value of dividends of next 4 years
Year Dividend Discount factor Present value
a b c=1.085^-a d=b*c
1 $       1.61 0.921659 $       1.48
2 $       1.93 0.849455 $       1.64
3 $       2.32 0.782908 $       1.82
4 $       2.55 0.721574 $       1.84
Total $       6.78
Working:
Dividend of Year:
1 = $       1.15 * 1.4 = $       1.61
2 = $       1.61 * 1.2 = $       1.93
3 = $       1.93 * 1.2 = $       2.32
4 = $       2.32 * 1.1 = $       2.55
Step-2:Present value of dividend after year 4
Present value = D4*(1+g)/(K-g)*DF4 Where,
= $    42.53 D4 $       2.55
g 4%
K 8.50%
DF4 0.721574
Step-3:Sum of present value of future dividends
Sum of present value of future dividends = $       6.78 + $    42.53
= $    49.31
So, price of stock is $    49.31
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