Question

Hello I have a finance question I am confused on. A stock just paid a dividend of $1.92. The dividend is expected to grow at 27.09% for three years and then grow at 3.74% thereafter. The required return on the stock is 10.80%. What is the value of the stock? Any help would be greatly appreciated!

Answer 1

The value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + 1 / (1 + required rate of return)³ [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 1.92 x 1.2709) / 1.1080 + ($ 1.92 x 1.2709²) / 1.1080² + ($ 1.92 x 1.2709³) / 1.1080³ + 1 / 1.1080³ [ ($ 1.92 x 1.2709³ x 1.0374) / ( 0.1080 - 0.0374) ]

= $ 2.440128 / 1.1080 + $ 3.101158675 / 1.1080² + $ 3.94126256 / 1.1080³ + 1 / 1.1080³ ( $ 57.91311303)

= $ 50.20 Approximately

Feel free to ask in case of any query relating to this question