Question

Given the following information, calculate the current value of the stock: current dividend is $3.00, projected super normal growth for three years at 20%, growth rate after year 3 should remain constant at 9% and you want to earn a 16% annual return. What should you pay for the stock?

Answer 1

Dividend for various year:
Year -1: 3.00 +20% = 3.60
Year-2 ; 3.60+20% = 4.32
Year-3: 4.32+20% = 5.18
Year-4 :   5.18+9% = 5.65
Stock price at end of Year-3= Dividen d of Year-4 / (Required rate-Growth rate)
			5.65 / (16-9)% = 80.71
Year	PVF at 16%	Cashflows	Present value
1	0.862069	3.6	3.103448
2	0.743163	4.32	3.210464
3	0.640658	5.18	3.318607
3	0.640658	80.71	51.70751
Stock price			61.34
Stock price today = 61.34