Delphi Products Corporation currently pays a dividend of $2.50 per share, and this dividend is expected to grow at a 12% annual rate for three years, and then at an 8% p.a. rate forever. What value would you place on the stock if an 18% rate of return was required?

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3.96K viewsJanuary 1, 2017

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Darshita 6.14K January 1, 2017 0 Comments

Delphi Products Corporation currently pays a dividend of $2.50 per share, and this dividend

is expected to grow at a 12% annual rate for three years, and then at an 8% p.a. rate forever.

What value would you place on the stock if an 18% rate of return was required?

score 0 · Answer 1 · 2017-01-01T06:29:47+00:00

Phases 1 and 2: Present Value of Dividends to Be Received Over First 6 Years

End of Present Value Calculation Present Value

Year (Dividend × PVIF18%,t) of Dividend

1 $2.50 (1.12)¹ = $2.80 × 0.847 = $ 2.37

2 2.50 (1.12)² = 3.14 × 0.718 = 2.25

3 2.50 (1.12)³ = 3.51 × 0.609 = 2.14

6.76

Phase 3: Present Value of Constant Growth Component

Dividend at the end of year 4 = $3.51(1.08) = $3.79

Value of stock at the end of year 3 = D₄/(k_e + g) = $ 3.79/(0.18 – 0.08) = $37.90

Present value of $37.90 at end of year 3= ($37.90) (PVIF_18%,3)

= ($37.90)(0.609) = $23.08

Present Value of Stock

V = $6.76 + $23.08 = $29.84

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