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Hewlett Packard recently paid a dividend of $2.50 for 2016, and going forward, their dividend is...

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Finance

Hewlett Packard recently paid a dividend of $2.50 for 2016, andgoing forward, their dividend is expected to grow at 3 percent peryear for the next 5 years, after which the dividend growth ratewill increase to 6 percent per year indefinitely. Assuming a 10percent required rate of return, compute that value of a share ofcommon stock for HP.

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Step-1:Calculation of present value of next 5 years dividend
Year Dividend Discount factor Present value
a b c=1.10^-a d=b*c
1 $       2.58 0.909091 $       2.34
2 $       2.65 0.826446 $       2.19
3 $       2.73 0.751315 $       2.05
4 $       2.81 0.683013 $       1.92
5 $       2.90 0.620921 $       1.80
Total $    10.31
Working:
Dividend of Year:
1 = $       2.50 x 1.03 = $       2.58
2 = $       2.58 x 1.03 = $       2.65
3 = $       2.65 x 1.03 = $       2.73
4 = $       2.73 x 1.03 = $       2.81
5 = $       2.81 x 1.03 = $       2.90
Step-2:Calculation of present value of dividends after year 5
Present value = D5*(1+g)/(K-g)*DF5 Where,
= $    47.69 D5 $       2.90
g 6%
K 10%
DF5 0.620921
Step-3:Calculation of current stock price of stock
As per dividend discount model, current share price is the present value of future dividends.
Present value of future dividends = $    10.31 + $    47.69
= $    57.99
So, current value of a share is $ 57.99
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