Question

# Microsoft has just paid a dividend of \$1 per share (this dividend is already paid sometimes...

Microsoft has just paid a dividend of \$1 per share (this dividend is already paid sometimes called Dividend 0). It is estimated that the companys dividend will grow at a rate of 35% in year 1 and 20% in year 2.  The dividend is then expected to grow at a constant rate of 7% thereafter.  The companys opportunity cost of capital is 11% what is an estimate Microsofts stock using the nonconstant growth technique?

To calculate price of stock we require to first calculate the dividend of Year 1 and Year 2 and terminal value or say price of share at the end of Year 2 using gordon growth model and find the present value of all future value i.e. current price of stock.

D0 = \$1

D1 = \$1 x (1+g) = \$1 x (1+0.35) = \$1.35

D2 = \$1.35 x (1+g) = \$1.35 x (1+0.20) = \$1.62

Terminal Value or say price of share at the end of year -2

= D3 / (ke - g) (D3 = D2 x (1+g) = \$1.62 x (1+0.07) = \$1.7334

= \$1.7334 / (0.11 - 0.07)

= \$1.7334 / 0.04

= \$43.335

Now we find out the present value of future cashflow

 Year Dividend DF @ 11% PV 1 \$1.35 0.900900901 \$1.22 2 \$1.62 0.811622433 \$1.31 Stock Price at end of year 2 \$43.335 0.731191381 \$31.69 Present Value / Current Value of Stock \$34.22

Estimated value of stock price of microsoft is \$34.22.

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