Question

Verona Industries just paid a dividend of $1.80. You expect the dividend to grow at 12% for the next two years, and then the dividend will grow at 5% for the foreseeable future. You estimate the appropriate discount rate is 10.75%. Using this information you estimate the current price for Verona is closest to: A. $37.88. B. $50.06. C. $41.53.

Answer 1

	Given data
	Dividend Paid (Do)	$1.80
	Dividend growth year 1 & 2	12%
	After year 2 Dividend growth rate (g)	5%
	Discount rate ( r )	10.75%
Year	Particular	Dividend Value	Present Value formula	Present Value
1	Dividend (D1) = D0*(1+g) =1.80*(1+12%)	$2.02	=2.02/(1+10.75%)^1	$1.82
2	Dividend (D2) = D1*(1+g) =2.02*(1+12%)	$2.26	=2.26/(1+10.75%)^2	$1.84
2	Terminal Value (Horizon Value)=D2*(1+g)/r-g =2.26*(1+5%)/(10.75%-5%)	$41.23	=41.23/(1+10.75%)^2	$33.62
			Stock Price (total of present value) =	$37.28