Question

A stock does not currently pay dividends but is expected to begin paying dividends in 3 years. The first dividend is expected to be $3. For each of the next 2 years dividends will grow at 20% each year. You expect to be able to sell the stock for $100 after you collect year 5's dividend. If your required return is 11%, what is the most you should pay for the stock? To solve, use the cash flow register on your financial calculator. (Enter only numbers and decimals in your response. Round to 2 decimal places.)

Answer 1

	Required rate	11.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	selling price	Total Value	Discount factor	Discounted value
1	0	0%	0		0	1.11	0
2	0	0%	0		0	1.232	0
3	0	0.00%	3		3	1.368	2.19298
4	3	20%	3.6		3.6	1.518	2.37154
5	3.6	20%	4.32	100	104.32	1.685	61.91098
					Value of Stock =	Sum of discounted value =	66.48

highest to pay = 66.48

Where
Current dividend =	Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend	+ selling price value (only for last year)

Discount factor=	(1+ required rate)^corresponding period
Discounted value=	total value/discount factor