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The Bloomington Electric Company operates in a stable industry and therefore has predictable dividend growth of 8% per year. The most recent annual dividend was paid yesterday in the amount of $4. Assume the appropriate discount rate is 15%.
What is the current stock price?
Answer
a) Current Stock Price=Dividend Received/Dividend Growth Rate =4/.08 =50
b)
Year
Dividend
D.F
PV
1
4.8
0.869565
4.173913
2
5.76
0.756144
4.355388
3
6.912
0.657516
4.544752
4
86.4
0.571753
49.39948
62.47353
b) ividend for infinite stream at 8% from 4th year =Dividend of that year /Rate of dividend
=6.91/.08
=86.4
c) Dividend Yield =Dividend Received/Stock Price
=4/40
=10%
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