Question

**Joe’s firm is fast growing. Therefore, it will pay no
dividend for the next 5 years. After that, Joe's firm will initiate
dividend payment. The first dividend will be $2 (at the end of the
6 ^{th} year) and the dividend will grow at a rate of 5% for
10 years. Then the industry starts to stabilize, and Joe’s firm
will pay $3 forever. If the required rate of return is 10%,
calculate the stock price.**

Answer #1

t | Cash Flow | Discounting Factor [1/(1.1^t)] |
PV of Cash Flow (cash flow*discounting factor) |
||||

1 | 0 | + | = | 0 | 0.909090909 | 0 | |

2 | 0 | + | = | 0 | 0.826446281 | 0 | |

3 | 0 | + | = | 0 | 0.751314801 | 0 | |

4 | 0 | + | = | 0 | 0.683013455 | 0 | |

5 | 0 | + | = | 0 | 0.620921323 | 0 | |

6 | 0 | + | = | 2 | 0.56447393 | 1.12894786 | |

7 | 2 | + | 5% | = | 2.1 | 0.513158118 | 1.077632048 |

8 | 2.1 | + | 5% | = | 2.205 | 0.46650738 | 1.028648773 |

9 | 2.205 | + | 5% | = | 2.31525 | 0.424097618 | 0.981892011 |

10 | 2.3153 | + | 5% | = | 2.431013 | 0.385543289 | 0.937260556 |

11 | 2.431 | + | 5% | = | 2.552563 | 0.350493899 | 0.894657803 |

12 | 2.5526 | + | 5% | = | 2.680191 | 0.318630818 | 0.85399154 |

13 | 2.6802 | + | 5% | = | 2.814201 | 0.28966438 | 0.815173742 |

14 | 2.8142 | + | 5% | = | 2.954911 | 0.263331254 | 0.77812039 |

15 | 2.9549 | + | 5% | = | 3.102656 | 0.239392049 | 0.742751282 |

16 | 3.1027 | + | 5% | = | 3.257789 | 0.217629136 | 0.70898986 |

16 | Terminal Value = [3/10%] |
30 | 0.217629136 | 6.528874074 | |||

Expected Share Price
today=sum of PVs |
16.47693994 =
$16.48 |

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