Banner Corporation will not pay dividends until year 3, whereby it is expected to pay $5 in dividends. Dividends are then expected to grow at 20%, 10% and 5% in years 4, 5 and 6.
Afterwards, dividend growth will stabilize to 2% consistently. If the rate of return is 10%, determine
The stock price next year.

Question

Quizplus · Accepted Answer

To find the stock price next year, calculate the present value of expected dividends starting from year 3. Discount each dividend back to year 1 using the rate of return (10%). The dividends are $5 in year 3, $6 in year 4, $6.6 in year 5, $6.93 in year 6, and then grow at 2% perpetually. The present value of these dividends gives the stock price next year, which is approximately $72.31.

Banner Corporation Will Not Pay Dividends Until Year 3, Whereby