Wilson's Furniture is experiencing good growth so has decided to commence paying dividends starting next year. The first dividend will be $0.50 a share with annual increases of 4 percent in the dividend amount. The discount rate is 11 percent. What will the value of this stock be three years from now?

Question

Quizplus · Accepted Answer

To calculate the value of the stock three years from now, we need to use the dividend discount model:

D1 = $0.50 * (1 + 4%) = $0.52
D2 = $0.52 * (1 + 4%) = $0.54
D3 = $0.54 * (1 +4%) = $0.56

So, the dividend in three years will be $0.56. Using the dividend discount model, we can calculate the stock price:

P3 = D4 / (r - g)

Where:
D4 = expected dividend in four years = D3 * (1 + 4%) = $0.58
r = discount rate = 11%
g = expected growth rate = 4%

P3 = $0.58 / (0.11 - 0.04) = $8.03

Therefore, the value of the stock three years from now is $8.03.

Wilson's Furniture Is Experiencing Good Growth So Has Decided to Commence