Question

Suppose a stock will pay $10 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: $10 Beginning of year 2 (2 years from today) is: $10 * 1.08 Beginning of year 3 (3 years from today) is: $10 * 1.08 * 1.04 and a 4% rate of growth every year after that. The required return is 9%. What is the stock's price today?

Answer 1

Dividend at Year-1 : 10
Dividend at Year-2 = 10+ 8% = 10.80
Dividend at Year-3 = 10.80+4% = 11.232
Horizon Value at Year-2 = Dividend of Year-3 / (Required rate-Growth rate)
		11.232 / (9-4)% = 224.64
Current stock price:
Year	Cashflows	PVF at 9%	Present value
1	10	0.917431	9.174312
2	10.8	0.84168	9.090144
2	224.64	0.84168	189.075
Current stock price:			207.34