Global Tek plans on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 2.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 17.4 percent? a. $1.82 b. $218 c. $2.03 d. $2.71 e. $3.05

A) $1.82

Explanation:

the dividends discount model is used to determine the value of stock given the distributed dividends and the required rate of return:

current dividend $0.20 per stock

dividends year 1 = $0.23 per stock

dividends year 2 = $0.2645 per stock

dividends year 3 = $0.3042 per stock

dividends year 4 = $0.35 per stock

after year 4, we need to calculate the growing perpetuity = dividend / (return rate - growth rate) = $0.35 / (17.4% - 2.5%) = $0.35 / 14.9% = $2.35

now we must find the present value of the cash flows:

PV = $0.23/1.174 + $0.2645/1.174² + $0.3042/1.174³ + $0.35/1.174⁴ + $2.35/1.174⁵ = $0.1959 + $0.1919 + $0.188 + $0.1842 + $1.0537 = $1.82