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Compute the value of stock of Teng Company

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Question - Tong Company is contemplating whether to buy shares in Teng Company which paid recently dividends of P5 per share. After carefully evaluating the business of Teng Company, Tong came up with the estimate that dividends may grow at 8% annual rate in the next 3 years. At the end of 3 years, Tong expected that the market will mature and organic growth will only lead to a constant 3% dividend growth in the foreseeable future. Tong uses 12% required return in evaluating his investments.

Required -

a. Compute the expected dividend in the next 3 years

b. Compute the present value of dividends expected to be received for each year

c. Compute the value of stock of Teng Company at the end of year 3 (last year of initial growth period) using the constant growth model.

Reference no: EM132739250

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