Question

Assume a stock that is expected to benet from supernormal growth of 8% in dividends per year over

the next six years. Following this period, dividends are expected to grow at a constant rate of 3% per

year forever. The stock paid a dividend of 5.50 last year.

Dividends are paid to shareholders once a year, the next payment is due one year from today, the second

payment two years from today, etc. The required rate of return on the stock is 10%.

Please provide numerical answers to the questions below:

(a) (10 points) What is the stock's fair present value ?

(b) (10 points) What is the contribution of growth to the stock's fair present value ?

(c) (10 points) In terms of the stock's fair present value, what is the implication of lowering the

growth estimate from 8% to 3%?

Answer 1

D0	5.5
g1	8%
g2	3%
r	10%
				1	2	3	4	5	6
				D1	D2	D3	D4	D5	D6	Stable Phase Dividend
			6	5.94	6.4152	6.928416	7.482689	8.081304	8.727809	8.989643039
				5.4	5.301818182	5.205421	5.110777	5.017854	4.926621	72.49170195
1	Stock Fare Price	103.45
2	Stocks Fare Price if thier would have been no growth	55
	Hence Contribution of growth	48.454
3	Stock fare price when rate gown down from 8% to 3% in supernatural growth period	80.929