Question

A stock just paid a dividend of $2.12. The dividend is expected to grow at 23.10% for five years and then grow at 3.25% thereafter. The required return on the stock is 10.24%. What is the value of the stock?

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Answer format: Currency: Round to: 2 decimal places.

Answer 1

D1=(2.12*1.231)=2.60972

D2=(2.60972*1.231)=3.21256532

D3=(3.21256532*1.231)=3.95466791

D4=(3.95466791*1.231)=4.8681962

D5=(4.8681962*1.231)=5.99274952

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(5.99274952*1.0325)/(0.1024-0.0325)

=88.5195119

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=2.60972/1.1024+3.21256532/1.1024^2+3.95466791/1.1024^3+4.8681962/1.1024^4+5.99274952/1.1024^5+88.5195119/1.1024^5

=$69.31(Approx)