Question

A stock just paid a dividend of $2.90. The dividend is expected to grow at 27.40% for five years and then grow at 4.73% thereafter. The required return on the stock is 14.30%. What is the value of the stock?

Answer format: Currency: Round to 2 decimal places.

Answer 1

D1=(2.9*1.274)=3.6946

D2=(3.6946*1.274)=4.7069204

D3=(4.7069204*1.274)=5.99661659

D4=(5.99661659*1.274)=7.63968954

D5=(7.63968954*1.274)=9.73296447

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(9.73296447*1.0473)/(0.143-0.0473)

=106.513414

Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)

=3.6946/1.143+4.7069204/1.143^2+5.99661659/1.143^3+7.63968954/1.143^4+9.73296447/1.143^5+106.513414/1.143^5

=$74.91(Approx).