A stock is expected to pay the following dividends: $2.6 two years from now, and $3 three years from now, followed by growth in the dividend of 7% per year forever after that point. There will be no dividends prior to year 2. The stock's required return is 13%. The stock's current price (Price at year 0) should be $____________.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
A stock is expected to pay the following dividends: $2.6 two years from now, and $3 three years from now, followed by growth in the dividend of 7% per year forever after that point. There will be no dividends prior to year 2. The stock's required return is 13%. The stock's current price (Price at year 0) should be $____________.
Do not round any intermediate work, but round your final answer to 2 decimal places (ex: $12.34567 should be entered as 12.35). Do not enter the $ sign.
The question is based on the concept of valuation of stock based on dividend discount model. Here , two stage dividend discount model will be used for calculation as,
D 2 and D 3 = Dividend for second and third years respectively
r = required rate of return
g= expected growth rate after third year
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