00:01
In the given question to solve, first of all, the step one is going to be the calculation of future dividend.
00:08
So we will be first of all calculating the future dividend that is to be paid.
00:14
So for the first three years it is already given to us what will be the dividend.
00:19
And thereafter, it is said that the dividend will have a constant growth rate.
00:23
So first of all, we will be writing down all the dividends that is to be paid in future.
00:29
So it is given in the question that for the first three years the dividend is going to be we will be writing as d1 d2 and d3 so the dividend are given as 0 .55 for the second it is given as 0 .80 dollars and for the third it is given as 1 .10 now after this three years dividend the next year dividend from next onward that is after three years the dividend are going to be grow at a rate of 5 % annually.
01:02
So this dividend that is d4 is going to be d3 times 1 plus the growth rate and if you saw this this is going to be 1 .10 times 1 .001 .05 sorry the growth is of 5 % therefore this comes to 1 .15.
01:32
So these are the dividend that will be paid in future.
01:36
So now we need to do what in order to have the current price of the stock.
01:41
First of all, we need to find out the present values of all these dividends.
01:45
So the step two is going to be the calculation of present value of the dividend payments.
01:53
Now for this, the required return rate is given to be 16%.
01:58
So required return rate is 16 % or we can say 0 .1 .1%.
02:04
So required return rate is 16 % or we can say 0 .1 .1.
02:08
So for this the present value of the dividend that is paid that is pv denotes the present value of d1 will be the payment of d1 upon 1 plus r to the power n similarly we will be finding the present value of d2 that is d2 upon 1 plus r to the power and this will be n plus 1 because it is after two years and for the dividend third years this will be d3 upon 1 plus r to the power n plus 2 so first of all we are going to find out the dividend that we are given with that is for 3 years dividend their present value so this will be the first year dividend that is d1 is 0 .55 upon 1 plus r that is 0 .16 the required return rate is 160 to the power 1 for the second year it is going to be 0 .80 upon 1 plus 0 .16 to the power 2 and for the third year this is going to be 0.
03:26
Sorry this is 1 .10 so this will be d3 that is 1 .10 upon 1 .10 upon 1 plus 0 .16 to the power 3 so upon solving this we will be arriving at the values for the first year dividend its present value is going to be 0 .4741.
03:53
For the second year's dividend, this is going to be 0 .5945.
03:59
And for the third, it is going to be 0 .7047.
04:06
Now, if we total this, the total tv of 3 years dividend, this will be the summation of this.
04:22
All three pvs.
04:24
Now we have with us the pvs or the present value of three years dividend.
04:28
Now it is said with the question that after this three year the dividend is going to be grow at a rate of 5 % annually and that will be a constant growth rate.
04:38
So what we need to do, we need to find out the stock price at this point of time and made it to the its present value.
04:46
So what we will be doing? we will be taking another calculation that is let this calculation be so, another calculation will be, that is step three is going to be calculation of present value of the stock price.
05:20
So for this, what we will be doing at year three, the stock price we will be calculating with dividend growth model.
05:36
So for this, we know that stock price is what? this is next year dividend upon the required rate of return that is k minus g...