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A company expects a 15% growth rate for the next 2 years and then a stable...

A company expects a 15% growth rate for the next 2 years and then a stable 7.2% growth. A $2.15 dividend is to be paid next year. What is the value of this stock to an investor requiring a 10% rate of return?

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Answer #1
For the first two years
g1 0.15
D1 2.15
D2 2.15*(1.15)
D2 2.4725
Find the price of the stock in year 3
g2 0.072
D3 2.4725*(1.072)
D3 2.65052
According to the dividend growth model.
P3 = D3/(R-g2)
where R is .10
P3 2.65052/(.10-.072)
P3 94.66143
The value of the stock today = sum of present value of future cash flows.
Using R = .10
Year 1 2 3
Cash flow 2.15 2.4725 94.66143
Present value 1.95 2.04 78.23
sum of present values 82.23
The value of the stock today is equal to $82.23.
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