Question

A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 30 percent for the next 7 years and then level off to a growth rate of 8 percent indefinitely.

   

If the required return is 14 percent, what is the price of the stock today?

Answer 1

A7X Corp.

Price of the stock today:

Year		Cash flows (CF)($)	present value factor (PVF) @ 14%	Discounted cash flows ($) (CF × PVF)
1	Dividend	1.55(1.3)1 = 2.015	0.877	1.767
2	Dividend	1.55(1.3)2 = 2.620	0.769	2.015
3	Dividend	1.55(1.3)3 ​​​​​= 3.405	0.675	2.298
4	Dividend	1.55(1.3)4 = 4.427	0.592	2.621
5	Dividend	1.55(1.3)5 = 5.755	0.519	2.987
6	Dividend	1.55(1.3)6 = 7.482	0.456	3.412
7	Dividend	1.55(1.3)7 = 9.726	0.400	3.890
7	Terminal value*	9.726(1.08)/(0.14-0.8) = 175.068	0.400	70.027
				89.017

Present value of stock is $ 89.017 (approximately)

Terminal value = {Dividend of year 7 × (1+Growth rate)} / (Required return - Growth rate)