Question

Hello, I have a finance question I am confused on. A stock just paid a dividend of $2.71. The dividend is expected to grow at 28.38% for five years and then grow at 4.69% thereafter. The required return on the stock is 13.76%. What is the value of the stock? (Round to 2 decimals) It says the correct answer is $77.01 but I am having trouble trying to reach it. Any help would be greatly appreciated!

Answer 1

D1=(2.71*1.2838)=3.479098

D2=(3.479098*1.2838)=4.46646601

D3=(4.46646601*1.2838)=5.73404906

D4=(5.73404906*1.2838)=7.36137218

D5=(7.36137218*1.2838)=9.4505296

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(9.4505296*1.0469)/(0.1376-0.0469)

=109.082243

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=3.479098/1.1376+4.46646601/1.1376^2+5.73404906/1.1376^3+7.36137218/1.1376^4+9.4505296/1.1376^5+109.082243/1.1376^5

=$77.01(Approx).