Question

1. A stock just paid a dividend of $1.45. The dividend is expected to grow at 21.05% for three years and then grow at 4.37% thereafter. The required return on the stock is 10.14%. What is the value of the stock?

Answer 1

	Required rate=	10.14%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.45	21.05%	1.755225		1.755225	1.1014	1.5936
2	1.755225	21.05%	2.124699863		2.124699863	1.213	1.75161
3	2.124699863	21.05%	2.571949184	46.522	49.09394918	1.336	36.74697
	Long term growth rate (given)=	4.37%			Value of Stock =	Sum of discounted value =	40.09

Where
Current dividend =	Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend	+ horizon value (only for last year)
Horizon value =	Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=	(1+ Required rate)^corresponding period
Discounted value=	total value/discount factor