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Gruber Corp. pays a $9 dividend on its stock. The company will maintain this dividend for...

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Finance

Gruber Corp. pays a $9 dividend on its stock. The company willmaintain this dividend for the next 3 years. In year 4, thedividend will increase to $10 and then grow at a constant 5 percentrate annually into perpetuity. If the required return on this stockis 10 percent, what is the current share price?

Answer & Explanation Solved by verified expert
4.4 Ratings (639 Votes)

1) Calculation of stock's current price:
Year Amount PVF @10% Present value
1                       9.00 0.909                       8.18
2                       9.00 0.826                       7.44
3                       9.00 0.751                       6.76
4                     10.00 0.683                       6.83
4                   210.00 0.683                   143.43
Total                   172.64
Value of share is $172.64
Working:
Calculation of dividend:
Terminal value= Dividend(1+growth)/(return-growth)
                              =10*(1+0.05)/(0.10-0.05)
                              = 10.5/0.05=210

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