Question

**Suppose a stock will pay $12 per share dividend in one
year's time. The dividend is projected to grow at 8% the following
year, and then 4% per year indefinitely after that.**

**To clarify, dividend at beginning of year 1 (that is,
one year from today) is:**

**$12**

**Beginning of year 2 (2 years from today)
is:**

**$12 * 1.08**

**Beginning of year 3 (3 years from today)
is:**

**$12 * 1.08 * 1.04**

**and a 4% rate of growth every year after
that.**

**The required return is 8%. What is the stock’s price
today?**

Answer #1

Required rate | 8.00% | ||||||

Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |

1 | 0 | 0% | 12 | 12 | 1.08 | 11.1111 | |

2 | 12 | 8% | 12.96 | 336.96 | 349.92 | 1.166 | 300.10292 |

Long term growth rate = | 4% | Value of Stock = | Sum of discounted value = | 311.21 |

Where | |||

Discount factor= | (1+ required rate)^N | ||

Discounted value= | total value/discount factor | ||

Total value = Dividend | + terminal value | ||

Horizon value = year 2 | Dividend *(1+long term gro | wth rate)/( required rate-long | term growth rate) |

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