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A stock just paid a dividend of $2.38. The dividend is expected to grow at 20.99%...

A stock just paid a dividend of $2.38. The dividend is expected to grow at 20.99% for three years and then grow at 4.07% thereafter. The required return on the stock is 10.70%. What is the value of the stock? round to 2 decimals

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Answer #1

Year 1 dividend = 2.38 (1 + 20.99%) = 2.879562

Year 2 dividend = 2.879562 (1 + 20.99%) = 3.483982

Year 3 dividend = 3.483982 (1 + 20.99%) = 4.21527

Year 4 dividend = 4.21527 (1 + 4.07%) = 4.386831

Value at year 3 = D4 / required rate - growth rate

Value at year 3 = 4.386831 / 0.107 - 0.0407

Value at year 3 = 4.386831 / 0.0663

Value at year 3 = 66.16638

Value of stock = Present value of future cash flows

Value of stock = 2.879562 / (1 +0.107)^1 + 3.483982 / (1 + 0.107)^2 + 4.21527 / (1 + 0.107)^3 + 66.16638 / (1 + 0.107)^3

Value of stock = $57.33

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