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Cougar Software, a fast-growing clothier, just paid a dividend of $1.64. Analysts project annual dividend growth...

Cougar Software, a fast-growing clothier, just paid a dividend of $1.64. Analysts project annual dividend growth to be 20% for the next 4 years, and then 5% thereafter. If investors’ required rate of return is 8%, what should the price of the stock be? Round to the nearest cent. Do not include the dollar sign in your answer. (i.e. If your answer were $1.23, then type 1.23 without a $ sign

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Answer #1

In this problem, the dividend growth is in two different stages. That is the rate of growth of dividend is 20% for 4 years and thereafter it is 5%. So in order to find out the price of the stock, the formula of TWO-Stage Dividend growth model can be used

Where g1 = 20%, g2 = 5%

n = 4 years

D1 = D0 (1 + g1) = 1.64 (1 + 0.20) = 1.968 ; where D0 = 1.64

r = 8%

Therefore the price of the Stock must be 96.065

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