Question

Could I Industries just paid a dividend of $1.32 per share. The dividends are expected to grow at a rate of 17.5 percent for the next five years and then level off to a growth rate of 6 percent indefinitely. If the required return is 14 percent, what is the value of the stock today?

Answer #1

**The value is computed as shown below:**

**= Dividend in year 1 / (1 + required rate of
return)**^{1}**+**
**Dividend in year 2 / (1 + required rate of
return)**^{2}**+ Dividend in
year 3 / (1 + required rate of
return)**^{3}**+ Dividend in
year 4 / (1 + required rate of
return)**^{4}**+ Dividend in
year 5 / (1 + required rate of
return)**^{5}**+ 1 / (1 +
required rate of return)**^{5}**[ ( Dividend in year 5 (1 + growth rate) / ( required rate
of return - growth rate) ]**

= ($ 1.32 x 1.175) / 1.14 + ($ 1.32 x 1.175^{2}) /
1.14^{2} + ($ 1.32 x 1.175^{3}) / 1.14^{3}
+ ($ 1.32 x 1.175^{4}) / 1.14^{4} + ($ 1.32 x
1.175^{5}) / 1.14^{5} + 1 / 1.14^{5} x [ ($
1.32 x 1.175^{5} x 1.06) / (0.14 - 0.06) ]

= $ 1.551 / 1.14 + $ 1.822425 / 1.14^{2} + $ 2.141349375
/ 1.14^{3} + $ 2.516085516 / 1.14^{4} + $
2.956400481 / 1.14^{5} + $ 39.17230637 /
1.14^{5}

**= $ 27.58 Approximately**

Feel free to ask in case of any query relating to this question

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