Question

Janzy shares are currently selling at $5.50 each. Last year's dividends were $0.55 per share. The dividends are expected to grow at 7.5% per year for the next two years and then at a more gradual rate of 6% a year indefinitely. You wish to earn a return of 10% per year. Determine the value of the stock today. (Please explain the answer in detail, thank you)

Answer 1

Value of stock Today = 13.72 %

last year's Dividend (D0) = $ 0.55

Growth rate (g) = 7.5 %

Dividend at year 1 (D1) = D0 * (1 + g)

= 0.55 * 1.075 = 0.59125

Dividend at year 2 (D2) = D1 * (1 + g)

= 0.59.125 * 1.075 = 0.635594

Growth rate after 2 years 6 % indefinitely

Dividend at year 3 (D3) = D2 * (1 + g)

= 0.635594 * 1.06 = 0.6732

Price (P2) = D3 / [ K - g]

= 0.6732 / [ 0.10 - 0.06]

= $ 16.84

Year	Particulars	Amount	PVF (10 %)	PV
1	D1	0.59125	0.909091	0.5375
2	D2	0.635594	0.826446	0.525284
2	P2	16.84323	0.826446	13.92002
Value of Stock Today				14.9828