Question

ZZZ Industries just paid a dividend of $1.35 per share. The dividends are expected to grow at a 27 percent rate for the next 5 years and then level off to a 3 percent growth rate indefinitely. If the required return is 8.51 percent, what is the value (in $) of the stock today? Answer to two decimals, carry intermediate calculations to four decimals.

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Answer 1

D0 = 1.35

D1 = 1.35 * 1.27 = 1.7145

D2 = 1.71450 * 1.27 = 2.1774

D3 = 2.1774150 * 1.27 = 2.7653

D4 = 2.76531705 * 1.27 = 3.5120

D5 = 3.511952654 * 1.27 = 4.4602

D6 = 4.4601799 * 1.03 = 4.5940

P5 = D6/ (Required rate - growth rate)

P5 = 4.593985266/ (8.51% - 3%)

P5 = 83.3754

P0 = 1.71450/ (1.0851)¹ + 2.1774150/ (1.0851)² + 2.76531705/ (1.0851)³ + 3.511952654/ (1.0851)⁴ + 4.4601799/ (1.0851)⁵ + 83.37541/ (1.0851)⁵

P0 = 1.58 + 1.85 + 2.16 + 2.53 + 2.96 + 55.42

P0 = 66.51