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)