Hunter Petroleum Company paid a $2 dividend last year. The dividend is expected to increase at a constant rate of 5% over the next 3-years. The required rate of return is 12%(this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate.
a. Compute the anticipated value of the dividends for the next three years. That is, compute D1, D2, and D3; for example, D1 is $2.10 ($2.00 _ 1.05).
b. Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.
c. Compute the price of the stock at the end of the third year (P3)...
d. After you have computed P3, discount it back to the present at a discount rate of 12 percent for three years.
e. Add together the answers in part b and part d to get P0, the current value of the stock. This answer represents the present value of the first three periods of dividends, plus the present value of the price of the stock after three periods (which, in turn, represents the value of all future dividends).
f. Use Formula 10-9 to show that it will provide approximately the same answer as part e.