Question

A stock just paid a dividend of $1.19. The dividend is expected to grow at 23.36% for two years and then grow at 3.67% thereafter. The required return on the stock is 13.00%. What is the value of the stock?

Answer 1

year	dividend	present value factor @ 13%	present value of cash flow
1	$1.19 (1.2336)=>1.467984	1/(1.13)^1=>0.88495575	1.29910088
2	$1.467984(1.2336)=>1.81090506	1/(1.13)^2=>0.78314668	1.41820429
2	price ($20.1218144) (see note)	1 /(1.13)^3=0.69305016	13.9454267
		value of stock	$16.66.

note:

from year 3 onwards there will be a constant growth of 3.67%

as per growth model

price = dividend (1+growth rate) / (required return - growth rate)

so price at the end of year 2 = [$1.81090506 *(1.0367) ] / (0.13 - 0.0367)

=>$20.1218144