Question

if your stock paying annual dividends will pay a dividend d1 at t=1 of 1.47 and have a growth rate of 11% between t=1 and t=2 and with a constant growth rate of 4% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 7%?

Answer 1

The value is computed as shown below:

= Dividend in year 1 / ( 1 + required rate of return)¹ + Dividend in year 2 / ( 1 + required rate of return)² + 1 / ( 1 + required rate of return)² [ ( Dividend in year 2 (1 + growth rate) / ( required rate of return - growth rate) ]

= 1.47 / 1.07 + (1.47 x 1.11) / 1.07² + 1 / 1.07² x [ ($ 1.47 x 1.11 x 1.04) / (0.07 - 0.04) ]

= 1.47 / 1.07 + 1.6317 / 1.07² + 1 / 1.07² x [ ( 56.5656) ]

= 1.47 / 1.07 + 58.1973 / 1.07²

= 52.21 Approximately

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