Question

Brickhouse is expected to pay a dividend of $3.30 and $2.52 over the next two years, respectively. after that, the company is expected to increase its annual dividend at 4.2 percent. what is the stock price today if the required return is 11.6 percent?

Answer 1

The company’s stock price today would be $33.46.

• Dividend per share for the first 2 years

Dividend per share Year 1 (D1) = $3.30 per share

Dividend per share Year 2 (D2) = $2.52 per share

• Calculation of Stock Price for the Year 2 (P2)

Stock Price for the Year 2 (P2) = D2(1 + g) / (Ke – g)

= $2.52(1 + 0.042) / (0.1160 – 0.042)

= $2.63 / 0.0740

= $35.48 per share

• The Stock Price today

The company’s stock price is the Present Value of the future dividend payments and the present value the stock price for the year 2

The Stock Price = D1/(1 + r)1 + D2/(1 + r)2 + P2/(1 + r)2

= $3.30/(1 + 0.1160)1 + $2.52/(1 + 0.1160)2 + $35.48/(1 + 0.1160)2

= [$3.30 / 1.1160] + [$2.52 / 1.24546] + [$35.48 / 1.24546]

= $2.95 + $2.02 + $28.49

= $33.46 per share

Hence, the company’s stock price today would be $33.46.

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