Question

The last dividend paid by KU dairy was $1.00. The dairy growth rate is expected to be a constant 5% for 2 years, after which dividends are expected to grow at a rate of 10%. The company required rate of return on equity is 12%. Calculate the current price of the common stockThe last dividend paid by KU dairy was $1.00. The dairy growth rate is expected to be a constant 5% for 2 years, after which dividends are expected to grow at a rate of 10%. The company required rate of return on equity is 12%. Calculate the current price of the common stock

Answer 1

	Required rate=	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1	5.00%	1.05		1.05	1.12	0.9375
2	1.05	5.00%	1.1025	60.638	61.7405	1.2544	49.21915
	Long term growth rate (given)=	10.00%			Value of Stock =	Sum of discounted value =	50.16
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor