Question

1. A stock just paid a dividend of $1.24. The dividend is expected to grow at 23.91% for five years and then grow at 3.67% thereafter. The required return on the stock is 12.59%. What is the value of the stock?

Answer 1

D1=(1.24*1.2391)=1.536484

D2=(1.536484*1.2391)=1.903857324

D3=(1.903857324*1.2391)=2.35906961

D4=(2.35906961*1.2391)=2.923123154

D5=(2.923123154*1.2391)=3.6220419

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

=(3.6220419*1.0367)/(0.1259-0.0367)

=$42.09608562

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

=1.536484/1.1259+1.903857324/1.1259^2+2.35906961/1.1259^3+2.923123154/1.1259^4+3.6220419/1.1259^5+$42.09608562/1.1259^5

=$31.61(Approx).