Question

1. Stock X just paid a dividend of $2.0 a share.  Growth is expected to be 8% for 6-years and then 3% there on.  Given a ks= 10%, find P₂. (without using excel and please include formulas work work problem)

Answer 1

Dividend in year 1(D1)= dividend in year 0 (1+growth rate)

= 2 (1+0.08)

= 2 (1.08)

= 2.16

Dividend in year 2 (D2)= D1 (1+g)

= 2.16 (1.08)

= 2.3328

Dividend in year 3 (D3)= D2 (1+g)

= 2.3328 (1.08)

= 2.519

Dividend in year 4 (D4)= D3 (1+g)

= 2.519 (1.08)

= 2.721

Dividend in year 5 (D5)= D4 (1+g)

= 2.721 (1.08)

= 2.939

Dividend in year 6 (D6)= D5 (1+g)

= 2.939 (1.08)

= 3.174

Dividend in year 7 (D7)= D6 (1+g)

= 3.174 (1.03)

= 3.269

Price = D1/(1+r)^1 + D2/(1+r)^2 + D3/(1+r)^3 + D4/(1+r)^4 + D5/(1+r)^5 + D6/(1+r)^6 + (D7/r-g)/(1+r)^6

= 2.16/(1.10)^1 + 2.3328/(1.10)^2 + 2.519/(1.10)^3 + 2.721/(1.10)^4 + 2.939/(1.10)^5 + 3.174/(1.10)^6 + (3.269/0.10 - 0.03) / (1.10)^6

= 2.16/1.10 + 2.3328/1.21 + 2.519/1.331 + 2.721/1.4641 + 2.939 / 1.61051 + 3.174/1.772 + (3.269/0.07)/1.772

= 1.96 + 1.93 + 1.89 + 1.86 + 1.82 + 1.79 + 46.7/1.772

= 11.25 + 26.35

= $37.60