Question

Given the information in the table, what is TODAY’s price of the stock? Today’s Dividend $3.69 Discount Rate 6.81% Growth rate in dividends 0 to 1 8.42% Growth rate in dividends 1 to 2 7.04% Growth rate in dividends 2 to 3 5.32% Growth rate in dividends 3 onward 2.35%

Answer 1

The value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + 1 / (1 + required rate of return)³ [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 3.69 x 1.0842) / 1.0681 + ($ 3.69 x 1.0842 x 1.0704) / 1.0681² + ($ 3.69 x 1.0842 x 1.0704 x 1.0532) / 1.0681³ + 1 / 1.0681³ x [ (($ 3.69 x 1.0842 x 1.0704 x 1.0532 x 1.0235) / (0.0681 - 0.0235) ]

= $ 4.000698 / 1.0681 + $ 4.282347139 / 1.0681² + $ 4.510168007 / 1.0681³ + $ 103.501277 / 1.0681³

= $ 4.000698 / 1.0681 + $ 4.282347139 / 1.0681² + $ 108.011445 / 1.0681³

= $ 96.14

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