Question

A company just paid a dividend of D_{0} = $3.75.
Analysts expect the company's dividend to grow by 30% this year, by
10% in Year 2, and at a constant rate of 5% in Year 3 and
thereafter. The required return on this low-risk stock is 9.00%.
What is the best estimate of the stock’s current market value?

Answer #1

The stock's current market value = $**127.46**

Year |
Dividend |
Present Value
(ke=9%) |
Dividend Growth Rate
(g) |
|||

D0 | $ 3.75 | |||||

1 | D1 | $ 4.88 | D0x(1+g) | $ 4.47 | D1/(1+ke)^1 | 30.00% |

2 | D2 | $ 5.36 | D1x(1+g) | $ 4.51 | D2/(1+ke)^2 | 10.00% |

2 | P2 | $ 140.77 | D2x(1+g)/(Ke-g) | $ 118.48 | D3/(1+ke)^3 | 5.00% |

Present Value of
cashflows |
$
127.46 |

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