Question

Hames conventioneers inc currently (d0) pays a $2.40 common stock dividend. Dividends have been recently growing at a 15% annual rate and are expected to continue growing at this rate for the next 3 years, then at 10% rate for the next two years, and thereafter at a 5% rate into the foreseeable future. What is the current value of hames conventioneer's common stock to an investor requiring a 18 percent rate of return?

Answer 1

Answer : Calculation of Current Value of Stock

Current value is the sum of Dividend Payment and Horizon Value.

Year	Dividend	PVF @18%	Present Value of Dividend
0	2.4
1	2.76 (2.4 * 1.15)	0.847457627	2.338983051
2	3.174(2.76 * 1.15)	0.71818443	2.27951738
3	3.6501 (3.174*1.15)	0.608630873	2.221563548
4	4.01511(3.6501*1.10)	0.515788875	2.070949071
5	4.416621 (4.01511*1.10)	0.437109216	1.930545744
5 (Horizon Value)	35.6727081[(4.416621*1.05)/(0.18-0.05)]	0.437109216	15.59286947
		Current Stock Price	26.43442826 or 26.43