Question

Company A paid $0.5 dividend per share last year. The dividend will be growing at 30% for three more years and will drop to 10% and remain indefinitely. Calculate the value of the share today if the required rate of return of the shares is 20%

Answer 1

year	Dividend	Discount factor	p.v of dividend
1	0.65	0.833	0.54145
2	0.845	0.6944	0.586768
3	1.0985	0.5787	0.63570195
T.V	12.0835	0.5787	6.99272145
value of share			8.7566414

value of the stock can be calculated by using dividend discount model

for first 3 years dividend will grow at 30% then 10%

calculation of T.v

formula is = D4/[ke-g]

where ke is expected return=20%

g is growth rate = 10%

=1.20835/[0.2-0.1] =12.0835