Question

Twenty years ago, Video Toys began manufacturing and selling coin-operated arcade games. Dividends are currently $2.80 per share, having grown at a 14% percent compound annual rate over the past 10 years. That growth rate is expected to be maintained for the next 2 years, after which dividends are expected to grow at half that rate for 3 years. Beyond that time, Video Toys's dividends are expected to grow at 5 percent per year. What is the current value of a share of Video Toys common stock if your required rate of return is 22%?

Answer 1

Current dividend (D0) = $2.80

Expected growth rate for next 2 years(g) = 14%

Growth rate from year 3 to 5(g1) = 7%

therafter growth rate (g2)= 5%

Required rate of return(Ke) = 22%

Computing Dividend amount from year 1 to year 6:-

Dividend	Formula	Result
D1	D0(1+g)	3.1920
D2	D1(1+g)	3.6389
D3	D2(1+g1)	3.8936
D4	D3(1+g1)	4.1662
D5	D4(1+g1)	4.4578
D6	D5(1+g2)	4.6807

Calculating the Current Value of Stock:-

P0 = 2.6164 + 2.4448 + 2.1442+1.8806+1.6494+10.1873

P0 = $20.92

So, Current value of share = $20.92

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