A common stock is expected to
A common stock is expected to pay no dividends during the next 7quarters but at the end of 6th quarter, it is expected to pay DPSof $1.0 and thereafter dividends are expected to be paid quarterlyand into indefinite future. The quarterly growth rate of dividendsstream is 1.0% and it is expected to stay the same into indefinitefuture. The required expected rate of return on the common stock is12% per annum.
Find:
(i)The current price per share of thestock.
(ii)The expected price per share at the beginning of the8th quarter.
Answer:
Given Information:
No Dividend in 7 quarters. Dividend from Quarter 8 =D8 = $1 , Growth = 1%, Required return = 12% perannum
Quarterly required return = 12/ 4 = 3%
ii) Calculate the price of the stock at the start of the 8thQuarter or end of Quarter 7.
Price of any security is the present value of future ecoonomicbenefits that security is going to generate discounted at requiredrate of return.
And if there is contant dividend and growth till perpetuity thenGordan growth model is widely used.
Formula = 
And if you are calculating stock price at beginning of quarter 8or end of Quarter 7 then replace P0 with P7 and D1 with D8.
So putting values in formula D8 =1, required return = 3%, Growth1 %
= 1 / ( 0.03 – 0.01)
= 1 / 0.02
Price os stock at the Beiginning of 8th= 50
i) Calculate the share price today.
Calculate the Pv of the price today i.e. bring that price 7quarters back. = 50 / (1.03)7
Stock price today = 40.6546
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