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Dunder Mifflin will pay its first dividend of $4.35 per share in eight years. They expect...

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Finance

Dunder Mifflin will pay its first dividend of $4.35 per share ineight years. They expect to grow the dividend at 10% per yearafterward. If you require a return of 18%, what is the most youwould be willing to pay for the stock today?

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4.1 Ratings (581 Votes)

Required rate= 18.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 0 0 1.18 0
2 0 0.00% 0 0 1.3924 0
3 0 0.00% 0 0 1.643032 0
4 0 0.00% 0 0 1.93877776 0.00
5 0 0.00% 0 0 2.287757757 0.00
6 0 0.00% 0 0 2.699554153 0
7 0 0.00% 0 0 3.185473901 0
8 0 0.00% 4.35 59.813 64.163 3.758859203 17.06981
Long term growth rate (given)= 10.00% Value of Stock = Sum of discounted value = 17.07
Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 8 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

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Dunder Mifflin will pay its first dividend of $4.35 per share ineight years. They expect to grow the dividend at 10% per yearafterward. If you require a return of 18%, what is the most youwould be willing to pay for the stock today?

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