Question

please show me how to do this using excel you do not expect there to be a dividend paid on a share of common stock next year. after that you expect a $2 dividend that will grow at a constant rate of 6% there after. how much would you pay for the stock assuming a cost of equity of 10%

Answer 1

When the dividend of the stock grows at a constant rate g
and the cost of equity is equal to r
Price of stock = Dividend/(r-g)
However, there will be no dividend in the first year, so we calculate
the price of the stock 1 year from now and discount it by a year using the cost of equity
Year	0	1	2	3	4	5	6
Dividend		0.00	2.00	2.12	2.25	2.38	2.52
Price of stock in year 1		2/(0.1-0.06)
Price of stock in year 1		50
Price of stock in year 0		50/(1+.10)
Price of stock in year 0		45.45
The price you will pay for the stock = $45.45