Polycorp has a current dividend of $5.00 due tomorrow and is expected to pay a dividend $5.50 at the end of the first year. Its dividend is expected to grow at 8% pa for the following year. Dividends are then expected to grow at 4% pa for another two years. Then they are expected to grow at 3.5%pa forever after that. Shareholders required return on equity is 11.85% pa. What is the current price (-dividend) of Polycorp shares?

Question

Polycorp has a current dividend of $5.00 due tomorrow and is expected to pay a dividend $5.50 at the end of the first year. Its dividend is expected to grow at 8% pa for the following year. Dividends are then expected to grow at 4% pa for another two years. Then they are expected to grow at 3.5%pa forever after that. Shareholders required return on equity is 11.85% pa. What is the current price (-dividend) of Polycorp shares?

Answer 1

To calculate the current price (-dividend) of Polycorp shares, we can use the dividend discount model (DDM) formula. The DDM formula states that the current price of a stock is equal to the present value of all future dividends.

Step 1: Calculate the present value of future dividends.
To calculate the present value of future dividends, we need to discount each dividend by the shareholders' required return on equity. In this case, the required return on equity is 11.85% pa.

Dividend 1 (due tomorrow):
PV(Dividend 1) = Dividend 1 / (1 + Required Return) ^ Time period
PV(Dividend 1) = $5.00 / (1 + 0.1185) ^ 1

Dividend 2 (end of first year):
PV(Dividend 2) = Dividend 2 / (1 + Required Return) ^ Time period
PV(Dividend 2) = $5.50 / (1 + 0.1185) ^ 2

Dividend 3 (second year):
PV(Dividend 3) = Dividend 3 / (1 + Required Return) ^ Time period
PV(Dividend 3) = $5.50 * (1 + 0.08) / (1 + 0.1185) ^ 3

Dividend 4 (third year):
PV(Dividend 4) = Dividend 4 / (1 + Required Return) ^ Time period
PV(Dividend 4) = $5.50 * (1 + 0.08) * (1 + 0.04) / (1 + 0.1185) ^ 4

Dividend 5 (fourth year and thereafter):
PV(Dividend 5) = Dividend 5 / (Required Return - Dividend Growth Rate)
PV(Dividend 5) = $5.50 * (1 + 0.08) * (1 + 0.04) * (1 + 0.04) / (0.1185 - 0.035)

Step 2: Calculate the sum of present values of dividends.
Sum of PV(Dividends) = PV(Dividend 1) + PV(Dividend 2) + PV(Dividend 3) + PV(Dividend 4) + PV(Dividend 5)

Step 3: Calculate the current price (-dividend) of Polycorp shares.
Current Price = Sum of PV(Dividends)

By adding up the present values of all the dividends, we can find the current price (-dividend) of Polycorp shares.

23

To calculate the current price (-dividend) of Polycorp shares, we can use the dividend discount model (DDM) formula. The DDM formula states that the current price of a stock is equal to the present value of all future dividends.