Company TYK forecasts that it will begin paying dividends seven years from now, at which point dividends are $1 per share. Thereafter, dividends are expected to growth at a constant rate of 6% per year. The discount rate for TYK is 10%. How much would you pay for one share in Company TYK?
Answers
Answer:
Company TYK forecasts that it will begin paying dividends seven years from now, at which point dividends are $1 per share. Thereafter, dividends are expected to growth at a constant rate of 6% per yea ...?"
Given:
Dividend at end of 7th year = $1 per share
Dividends are expected to growth at a constant rate of 6% per year.
The discount rate for TYK is 10%
To find:
How much would you pay for one share in Company TYK?
Solution:
In the given question, the dividend will be paid from the end of seven year. So first price of share at the end of 6th year need to be calculated.
Price at the end of 6th year = Dividend at end of 7th year
(Discount rate Growth rate)
Price at the end of 6th year = 1/(10% - 6%)
Price at the end of 6th year = 1/4%
Price at the end of 6th year =$ 25
Now discount the price of share to find the worth of the share.
Current price = 25/(1+10%)⁶
Current price = 14.11
We have to pay $14.11 for one share in Company TYK.