Noshima Industries issued dividends totaling $0.60 last year. For the next two years, it expects dividends to increase by 50% annually and then remain constant thereafter. How much is one share
Of Noshima Industries stock worth today if you require a 9% rate of return?

Question

Quizplus · Accepted Answer

To find the stock's worth today, calculate the present value of expected dividends. The dividends for the next two years are $0.90 and $1.35. After that, dividends remain constant at $1.35. Use the dividend discount model (DDM) for a growing perpetuity starting in year 3. The present value of the first two dividends is $0.90/(1.09) + $1.35/(1.09^2). The present value of the perpetuity starting in year 3 is $1.35/(0.09) discounted back to today. Sum these values to find the stock's worth.

Noshima Industries Issued Dividends Totaling $0