Question

1. Buckstars Inc. is a rapidly growing exotic herb company. The firm expects to pay its first dividend of $2.90 per share 3 years from today and management then expects to grow the dividend at 28% for 2 years. As competition enters the market, dividend growth after that will drop to 3% forever. If the appropriate discount rate is 10%, what is the share price today? Solve in excel and round your final answer to 2 decimal places.

Answer 1

Using excel to calculate Stock price using dividend discount model

	A	B	C	D	E	F	G
1	Year	1	2	3	4	5	6
2	Dividends	0	0	2.9	3.712	4.75136	4.8939008
3	Terminal value					69.91286857
4	Total value	0	0	2.9	3.712	74.66422857
5	Share Price	$51.07	NPV(10%,B4:F4)
	A	B	C	D	E	F	G
1	Excel Formulas
2	Dividends	0	0	2.9	2.9*1.28	2.9*1.28^2	2.9*1.28^2*1.03
3	Terminal value					2.9*1.28^2*1.03/(10%-3%)
4	Total value	B2+B3	C2+C3	D2+D3	E2+E3	F2+F3
5	Share Price	NPV(10%,B4:F4)

Share Price =51.07