Question

A fast-growing firm recently paid a dividend of $0.20 per share. The dividend is expected to increase at a 20 percent rate for the next four years. Afterwards, a more stable 10 percent growth rate can be assumed. If an 11.5 percent discount rate is appropriate for this stock, what is its value? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Stock value $

Answer 1

Year	Particulars	Cash flow		Present value factor @ 11.5%		Present value of cash flows
1	Dividend per share	0.24	0.20*120%	0.8969		0.22
2	Dividend per share	0.288	0.24*120%	0.8044		0.23
3	Dividend per share	0.3456	0.288*120%	0.7214		0.25
4	Dividend per share	0.41472	0.3456*120%	0.6470		0.27
4	Price	30.4128	Refer working note given below	0.6470		19.68
Stock Value						$ 20.65

Working note:

Price at year 4 = Dividend of year 4 *(1+growth rate)/Discount rate – growth rate

Price at year 4 = 0.41472 * (1+0.10)/0.115-0.10) = 0.456192/0.015 = 30.4128

Stock value = $ 20.65