Answer :
Answer:
The stock should sell for $40.04 today
Explanation:
The current price per share or the fair price can be calculated using the two stage growth model of DDM or Dividend Discount Model. The DDM values a stock based on the present value of the expected future dividends from the stock. The price today can be calculated as follows,
P0 = D1 / (1+r) + D2 / (1+r)^2 + ... + Dn / (1+r)^n + [Dn * (1+g2) / (r - g2)] / (1+r)^n
Where,
- g1 is the initial growth rate
- g2 is the constant growth rate
- D1 is the dividend expected for the next period calculated as D0 * (1+g1)
- r is the required rate of return
P0 = 1.03 * (1+0.105) / (1+0.087) + 1.03 * (1+0.105)^2 / (1+0.087)^2 + .... +
1.03 * (1+0.105)^5 / (1+0.087)^5 +
[(1.03 * (1+0.105)^5 * (1+0.053)) / (0.087 - 0.053)] / (1+0.087)^5
P0 = $40.04
See the attached photo for the calculation of present values (PV) of dividend for year 1 to 5 dividends.
From the attached photo, we have:
Previous year dividend in year 1 = Dividend just paid = $1.03
Total of PV of dividends from year 1 to year 5 = $4.8973404048370
Year 5 dividend = $1.53562911214375
Therefore, we have:
Year 6 dividend = Year 5 dividend * (100% + Constant dividend growth rate) = $1.53562911214375 * (100% + 5.3%) = $1.61701745508737
Price at year 5 = Year 6 dividend / (Cost of capital - Constant dividend growth rate) = $1.61701745508737 / (8.7% - 5.3%) = $47.5593369143344
PV of price at year 5 = Price at year 5 / (100% + Cost of capital)^Number of years = $47.5593369143344 / (100% + 8.7%)^5 = $31.3392118720597
Therefore, we have:
Current stock price = Total of PV of dividends from year 1 to year 5 + PV of price at year 5 = $4.8973404048370 + $31.3392118720597 = $36.24
Therefore, the price the dividend-discount model predicts Highline stock should sell is the Current stock price of $36.24.
Learn more here: https://brainly.com/question/14980006.
