Question

Due to economic challenges XYZ Corp has suspended its dividend for the next two years. The following year, i.e. 3 years from today, the firm plans to resume dividend payment with a dividend of $2.25 and intends to grow this dividend at a constant rate of 3.4% per year thereafter. If investors require a rate of return of 7.2% for investing in this firm, what would investors be willing to pay for the stock today?

Answer 1

	Required rate=	7.20%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.072	0
2	0	0.00%	0		0	1.149184	0
3	0	0.00%	2.25	61.224	63.474	1.231925248	51.52423
	Long term growth rate (given)=	3.40%			Value of Stock =	Sum of discounted value =	51.52
Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor