Question

You have a stock which pays a $1.45 dividend which is expected to grow at 15% for the next four years, then at a constant 6% into the future, the discount rate is 10%.​

53.46 57.49 61.37 55.36 52.39

Answer 1

Assuming the question is to answer the current stock price,

Last dividend paid D0 = $1.45

dividends are expected to grow at 15% for the next four years

=> D1 = 1.45*1.15 = $1.67

D2 = 1.67*1.15 = $1.92

D3 = 1.92*1.15 = $2.21

D4 = 2.21*1.15 = $2.54

thereafter growth rate g = 6%

discount rate d = 10%

So, stock price at year 4 using constant dividend growth rate model is

P4 = D4*(1+g)/(d - g) = 2.54*1.06/(0.10-0.06) = $67.21

So, stock price today is sum of PV of future dividends and P4 discounted at d

=> P0 = D1/(1+d) + D2/(1+d)^2 + D3/(1+d)^3 + D4/(1+d)^4 + P4/(1+d)^4

=> P0 = 1.67/1.1 + 1.92/1.1^2 + 2.21/1.1^3 + 2.54/1.1^4 + 67.21/1.1^4 = $52.39

So, current stock price = $52.39