Question

Tesla does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Tesla to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 75% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 9% per year. If the required return on the stock is 16%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)?

Answer 1

- First Dividend in 3 years form today(D3) = $0.50

Growth rate of dividend in year 4 & 5(g) = 75%

Grwoth rate therafter per year forever(g1) = 9%

Required Rate of Return(ke) = 16%

Calculating the Price of Stock today:-

P0 = $0.320 + $0.483 + $0.729 + $11.352

P0 = $12.88

So, the value of the stock today is $12.88

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