Question

Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Use the dividend values provided in the table below for your calculations. Do not round your intermediate calculations.

Year 0 1 2 3 4 5 6

Growth rate NA NA NA NA 60.00% 30.00% 8.00%

Dividends $0.000 $0.000 $0.000 $0.250 $0.400 $0.520 $0.562

Answer 1

Year	Dividend	(Ke) Discount Factor -11%
0	0	1
1	(D1) 0	0.901
2	(D2) 0	0.812
3	(D3) 0.250	0.731
4	(D4) 0.400	0.659
5	(D5) 0.520	0.593
6	(D6) 0.562	0.535

Growth Rate = 8% ( 5th year and onwards)

Value of Stock using Dividend discount model

P0 = (D1) / (1+Ke)1 + (D2) / (1+Ke)2 + (D3) / (1+Ke)3 + (D4) / (1+Ke)4 + (D5) / (1+Ke)5 + (D6) / (Ke-g) * 1/ (1+Ke)5

=0 + 0 + (0.25 * 0.731) + (0.4 * 0.659) + (0.52 * 0.593) + 0.562 / (11%-8%) *0.593

= $11.86