Question

A stock just paid a dividend of $2.56. The dividend is expected to grow at 20.57% for five years and then grow at 3.94% thereafter. The required return on the stock is 13.27%. What is the value of the stock?

Answer 1

Table showing Value of stock today

Year	Dividend		PVIF @ 13.27%	PV = Dividend *PVIF
1	2.56*1.2057	3.0866	0.8828	2.72
2	3.0866*1.2057	3.7215	0.7794	2.90
3	3.7215*1.2057	4.4870	0.6881	3.09
4	4.4870*1.2057	5.4100	0.6075	3.29
5	5.4099*1.2057	6.5228	0.5363	3.50
P5 = D5(1+g)/Ke-g =6.5228(1.0394)/13.27%-3.94% =6.7798/9.33% =72.6670		72.6670	0.5363	38.97
Value of stock today				54.47

here g = growth rate = 3.94%

Ke= required rate of return = 13.27%