Crystal glass recently paid $3.60 as an annual dividend. future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. beginning four years from now, the dividend is expected to increase by 3 percent annually. what is one share of this stock worth to you today if you require a 12.5 percent rate of return on similar investments? group of answer choices

$41.96

Explanation:

The first thing you need to do is to calculate terminal value at the end of time t = 3. Then the intrinsic value of the stock is sum of discounted cashflow from t =1 to t = 3 (cashflows at t = 3 includes dividend as well as terminal value).

Terminal value at t = 3 = Dividend in year 4/(Required rate of return - Dividend growth)

                                     = 4.25 x (1 + 3%)/(12.5% - 3%)

                                     = 46.08

Then value of the stock is calculated as below:

Stock intrinsic value = 3.8/(1 + 12.5%) + 4.1/(1 + 12.5%)^2 + (4.25 + 46.08)/(1 + 12.5%)^3

                                  = 41.96

share price today  = $42.92

Explanation:

given data

annual dividend paid  = $3.60

dividends = $3.80

dividends = $4.10

dividends = $4.25

dividend  increase = 3.25 percent annually

discount rate = 12.5 percent

solution

we find here horizon value that is express as

horizon value P1=

horizon value P1 = $47.44

so share price today will be

share price today =  

share price today P2  =

share price today  = $42.92