Question

Your analysis of Toyota Inc. suggests that for the next 4 years, the company will experience an above average dividend growth rate of 4.0%. After that time, the dividend growth rate will fall to its historical average level of 3.2% and remain there inde?nitely. If the company just paid a dividend of $2.90 and you require a return of 12.4%, what should current stock price be if it follows the constant growth dividend model?

Work by hand no financial calculator

Answer 1

	Required rate	12.40%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2.9	4%	3.016		3.016	1.124	2.6833
2	3.016	4%	3.13664		3.13664	1.263	2.48348
3	3.13664	4%	3.2621056		3.2621056	1.42	2.29726
4	3.2621056	4%	3.392589824	38.056	41.44858982	1.596	25.97029
	Long term growth rate =	3%			Value of Stock =	Sum of discounted value =	33.43

Where
Discount factor=	(1+ required rate)^N
Discounted value=	total value/discount factor
Total value = Dividend	+ terminal value
Horizon value = year 4	Dividend *(1+long term gro	wth rate)/( required rate-long	term growth rate)