Question

The Dalton Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20 percent a year for the next four years and then decreasing the growth rate to 5 percent per year. The company paid its annual dividend in the amount of $1.00 per share yesterday. What is the current value of one share of this stock if the required rate of return is 9.25 percent?

Answer 1

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Answer:

Dividend 1 = 1.00 * (1+0.2)^1 = 1.2

Dividend 2 = 1.00 * (1+0.2)^2 = 1.44

Dividend 3 = 1.00 * (1+0.2)^3 =1.728

Dividend 4 = 1.00 * (1+0.2)^4 = 2.0736

P4 = (2.0736) * (1+0.05) / (0.0925 - 0.05)

P4 = 51.23

P0 = 1.2/ (1 + 0.078) + 1.44/ (1 + 0.078)^2 + 1.728/ (1 + 0.078)^3 + 2.0736/ (1 + 0.078)^4 + 51.23/  (1 + 0.078)^4

P0 = 41.05