Question

1.

Given the information in the table, what is TODAY’s price of the stock?

Today’s Dividend	$3.20
Discount Rate	3.00%
Growth rate in dividends 0 to 1	4.00%
Growth rate in dividends 1to 2	6.00%
Growth rate in dividends 2 to 3	5.00%
Growth rate in dividends 3 onward	9.00%

2.

Given the information in the table, what is the price of the stock in YEAR 1?

Today’s Dividend	$4.33
Discount Rate	7.46%
Growth rate in dividends 0 to 1	8.78%
Growth rate in dividends 1 to 2	9.24%
Growth rate in dividends 2 to 3	5.16%
Growth rate in dividends 3 onward	3.14%

Answer 1

1). D0 = $3.20

D1 = D0*(1 + g1) = $3.20 * (1 + 0.04) = $3.33

D2 = D1*(1 + g2) = $3.33 * (1 + 0.06) = $3.53

D3 = D2*(1 + g3) = $3.53 * (1 + 0.05) = $3.70

D4 = D3*(1 + gC) = $3.70 * (1 + 0.09) = $4.04

P3 = D4/(r-gC) = $4.04/(0.03-0.09)

As the r<g, the price of stock can't be calculated.

2). D0 = $4.33

D1 = D0*(1 + g1) = $4.33 * (1 + 0.0878) = $4.71

D2 = D1*(1 + g2) = $4.71 * (1 + 0.0924) = $5.15

D3 = D2*(1 + g3) = $5.15 * (1 + 0.0516) = $5.41

D4 = D3*(1 + gC) = $5.41 * (1 + 0.0314) = $5.58

P3 = D4/(r-gC) = $5.58/(0.0746-0.0314) = $5.58/0.0432 = $129.19

P0 = [D1/(1 + r)] + [D2/(1 + r)²] + [(D3+P3)/(1 + r)³]

= [$4.71/(1+0.0746)] + [$5.15/(1+0.0746)²] + [($5.41+$129.19)/(1+0.0746)³]

= $4.38 + $4.46 + $108.47

= $117.30

P1 = P0 * (1 + g1) = $117.30 * (1 + 0.0878) = $127.60