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?

Company TYK forecasts that it will begin paying dividends seven years from now, at which point dividends are $1 per share.
Dividends are expected to grow at a constant rate of 6% per year.
The discount rate for TYK is 10%.

Find:

Solution:

The dividend is the amount paid to the shareholders for their investment in the company.

Dividend at end of 7th year = $1 per share (given)

dividend expected growth rate = 6% (given)

the dividend will be paid from the end of seven years.

So find the price of the share at the end of the 6th year.

price at the end of the 6th year

= Dividend at the 7th year/discount rate growth rate

= 1/(10%-6%) = 1/4% = 25

price of the share at the end of the 6th year is $25

discount price 10% (given)

current price share = 25/(1+10%)^6

= 25/(1.1)^6

= 25/1.77

= 14.11

The current price of the share is $ 14.11

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