Answer to Question #278518 in Financial Math for Nandiny

Question

Voice Control Company has some issued shares for which the announced dividend is $7 and the dividend will grow at a rate of 6% for the next 5 years (Year1-5). From year 6 the growth rate will change to 8% and will continue thereafter. What is the current price of the share if the required rate of return rate is 10%?

 

Answer 1

The divident in Year 5 is:

$D5 = 7×1.06^5 = 9.37.$

The current price of the share is:

$P = \frac{9.37} {0.1 - 0.08} = 468.5.$