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Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent?

Respuesta :

Answer:

share price today  = $42.92

Explanation:

given data

annual dividend paid  = $3.60

dividends = $3.80

dividends = $4.10

dividends = $4.25

dividend  increase = 3.25 percent annually

discount rate = 12.5 percent

solution

we find here horizon value that is express as

horizon value P1= [tex]\frac{4.25*(1+0.0325)}{0.125-0.0325}[/tex]

horizon value P1 = $47.44

so share price today will be

share price today =  [tex]\frac{D1}{(1+0.125)^1} +\frac{D2}{(1+0.125)^2} +\frac{Horizon value}{(1+0.125)^3}[/tex]

share price today P2  = [tex]\frac{3.80}{(1+0.125)^1} +\frac{4.10}{(1+0.125)^2} +\frac{4.25-47.44}{(1+0.125)^3}[/tex]

share price today  = $42.92