I need a formula for:
A share of common stock of xyz ltd is expected to pay no dividends until next 2 years but at the end of year 2 it will pay $2 as dividends. Dividends are expected to grow at 4% per annum into indefinite future. Assume that the required expected ROR on xyz's common stock is 14%.
Find the current price per share of the stock.
To find the current price per share of the stock, we can use the dividend discount model (DDM) formula. The dividend discount model calculates the present value of all expected future dividends.
The general formula for the dividend discount model is:
P = D / (r - g)
Where:
P = Current price per share
D = Expected dividend at the end of year 2
r = Required rate of return
g = Expected dividend growth rate
In this case, we are given that the dividends start at year 2 and are expected to grow at a rate of 4% per annum. The required rate of return is 14%. Let's plug in the values into the formula:
P = $2 / (0.14 - 0.04)
Simplifying the equation, we get:
P = $2 / 0.10
P = $20
Therefore, the current price per share of the stock is $20.