Winter Time Adventures is going to pay an annual dividend of $2.86 a share on its common stock next year. This year, the company paid a dividend of $2.75 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth five years from now if the applicable discount rate is 11.7 percent?

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DeniceSandidge DeniceSandidge · Answer 1 · 2020-01-05T08:32:21+01:00

Answer:

share price at 5 year is $45.19

Explanation:

given data

annual dividend D1 = $2.86

paid a dividend Do = $2.75

discount rate K = 11.7 percent

to find out

share price of common stock be worth five years

solution

first we get here growth rate that is express as

growth rate = [tex]\frac{current\ dividend-previous\ dividend}{previous\ dividend}[/tex] ..................1

put here value we get

growth rate = [tex]\frac{2.86-2.75}{2.75}[/tex]

growth rate = 4%

so here dividend at 6 year will be

Dn = Do × [tex](1+g)^{n}[/tex] .............2

D6 = 2.75 × [tex](1+0.04)^{6}[/tex]

D6 = $3.48

so share price at five year will be

P5 = [tex]\frac{D6}{discount\ rate- growth\ rate}[/tex] .................3

P5 = [tex]\frac{3.48}{0.117-0.04}[/tex]

P5 = $45.19

so share price at 5 year is $45.19