Question

A stock just paid an annual dividend of $1.3. The dividend is expected to grow by...

A stock just paid an annual dividend of $1.3. The dividend is expected to grow by 9% per year for the next 4 years. The growth rate of dividends will then fall steadily from 9% after 4 years to 3% in year 8.

The required rate of return is 12%.

What is the stock price if the dividend growth rate will stay 3% forever after 8 years?

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Homework Answers

Answer #1

To calculate Stock Price we need to calculated in excel
Rate from year 1 to 4 = 9%
Rate in year 5 = 7.5%, Rate in year 6 = 6%, Rate in Year 7 = 4.5%, Rate in year 8 =3%

A B C D E F G H
1 Year 1 2 3 4 5 6 7 8
2 Dividend 1.417 1.54453 1.6835377 1.835056093 1.9726853 2.091046418 2.185143507 2.250697812
3 Excel formula (=1.3*1.09^A1) (=1.3*1.09^B1) (=1.3*1.09^C1) (=1.3*1.09^A1) (=D2*1.075) (=E2*1.06) (=F2*1.075) (=G2*1.075)
4 Terminal value 25.75798607 (Terminal value Formula = 1.3*1.03/(12%-3%)
5 Total 1.417 1.54453 1.6835377 1.835056093 1.9726853 2.091046418 2.185143507 28.00868388
Stock Price $19.34 (=NPV(12%,A5:H5)


Stock Price = 19.34

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