Question

Carla Vista, Inc., is a fast-growth company that is expected to grow at a rate of 23 percent (per year) for the next four years. It is then expected to grow at a constant rate of 6 percent. Carla Vista’s first dividend, of $3.60, will be paid in year 3. If the required rate of return is 20 percent, what is the current value of the stock if dividends are expected to grow at the same rate as the company? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Answer 1

Answer = $ 20.30

Note: Price Today = Present Value of Dividends + Present Value of Price at Year 4

= 4.22+16.08

= $ 20.30

Present Value of Dividends:

Year	Dividend	Discounting Factor(20%)	Present Value
0	-	-	-
1	-	-	-
2	-	-	-
3	3.60	0.58	2.09
4	4.43	0.48	2.13
Present Value of Dividends			4.22

Price at year 4 = Expected Dividend / (required return - growth rate)

= $ 4.69/(20%-6%)

= 33.50

Present Value of Price at year 4 = Price at year 4 * Present Value of discounting factor (rate, time)

= 33.50*0.48

= $ 16.08