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A company just paid a dividend of D0 = $3.75. Analysts expect the company's dividend to...

A company just paid a dividend of D0 = $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?

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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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