A security analyst is forecasting dividends for Boston Electric over the next four years, as...

Question:

A security analyst is forecasting dividends for Boston Electric over the next four years, as follows:

$1 (Y1)
$1.50 (Y2)
$2.00 (Y3)
$2.75 (Y4).

In addition, the analyst expects that the stock could be sold for $62.25 four years from now. If the required return on the stock is 8%, what is the stock worth today?

Dividend Growth Model

This is a model that is used to determine the price of the stock for a company that pays dividend, this is done by discounting the future dividends and cash flow back to the present at a given interest rate for a given period of time.

Answer and Explanation:

Given;-

D1 = $1

D2 = $1.50

D3 = $2.00

D4 = $2.75

Terminal value = $62.25

Required return on the stock(Ke) = 8%

The value of the stock is;

{eq}value = D1/(1+r)^{1} +D2/(1+r)^{2}+D3/(1+r)^{3}+ (D4+p0)/(1+r)^{4} {/eq}

{eq}value = 1/(1+0.08)^{1} +1.5/(1+0.08)^{2}+2.0/(1+0.08)^{3}+ (2.75+62.25)/(1+0.08)^{4} = 51.58 {/eq}


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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