Question

A stock just paid a dividend of $2.31. The dividend is expected to grow at 25.95% for five years and then grow at 3.10% thereafter. The required return on the stock is 12.72%. What is the value of the stock?

Answer 1

D1=(2.31*1.2595)=2.909445

D2=(2.909445*1.2595)=3.66444598

D3=(3.66444598*1.2595)=4.61536971

D4=(4.61536971*1.2595)=5.81305815

D5=(5.81305815*1.2595)=7.32154674

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(7.32154674*1.031)/(0.1272-0.031)

=78.4668887

Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)

=2.909445/1.1272+3.66444598/1.1272^2+4.61536971/1.1272^3+5.81305815/1.1272^4+7.32154674/1.1272^5+78.4668887/1.1272^5

=$59.43(Approx).