Question

: Assume today is December 31, 2019. Imagine Works Inc. just paid a dividend of $1.40...

: Assume today is December 31, 2019. Imagine Works Inc. just paid a dividend of $1.40 per share at the end of 2019. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 5% annually. The company's cost of equity (rs) is 10%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2019)? Do not round intermediate calculations. Round your answer to the nearest cent.
$   per share

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Answer #1

Year 1 dividend = 1.4 (1 + 18%) = 1.652

Year 2 dividend = 1.652 (1 + 18%) = 1.94936

Year 3 dividend = 1.94936 (1 + 18%) = 2.30024

Year 4 dividend = 2.30024 (1 + 5%) = 2.41526

Value in year 3 = Year 4 dividend / required rate - growth rate

Value in year 3 = 2.41526 / 0.1 - 0.05

Value in year 3 = 2.41526 / 0.05

Value in year 3 = $48.30514

Price today = Present value of cash inflows

Present value = Future value / (1 + rate)^time

Price today = 1.652 / (1 + 0.1)^1 + 1.94936 / (1 + 0.1)^2 + 2.30024 / (1 + 0.1)^3 + 48.30514 / (1 + 0.1)^3

Price today = 1.50182 + 1.61104 + 1.7282 + 36.29237

Price today = $41.13

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