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A common stock just paid a dividend of $1. The dividend is expected to grow at...

A common stock just paid a dividend of $1. The dividend is expected to grow at 5% for 6 years, then it will grow at 4% for the next 4 years, and then it will grow at 3% forever. The discount rate is 12% in the first 8 years, and 10% afterwards.

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Answer #1

D0 = $1

D1= $1.05

D2= $1.1025

D3= $1.1576

D4= $1.2155

D5= $1.2763

D6= $1.3401

D7= $1.3937

D8= $1.4494

D9= $1.5074

D10 = $1.5677

P10 = D11/ Re - g

= $1.5677 *1.03/ 0.1 - 0.03

= $23.0679

So, the present value of stock is :

= $1.05/1.12 + $1.1025/1.12^2 + $1.1576/1.12^3 + $1.2155/1.12^4 + $1.2763/1.12^5 + $1.3401/1.12^6+ $1.3937 /1.12^7+ $1.4494/1.12^8 + $1.5074/1.1^9 + ($1.5677 + $23.0679) /1.1^10

= $5.4464 + $10.1374

= $15.5838

= $15.58 ( rounded off to two decimal places)

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