Question

If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.93 and have a growth rate of  10% between t=1 and t=2, and with a constant growth rate of 4% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 8%?  Notice that in this problem, expected dividends are given at t = 1, not t = 0! Answer to the nearest cent as in xx.xx and enter without the dollar sign

Answer 1

Dividend	Amount
D1	$           1.93
D2	$           2.12	1.93(1+0.1)
D3	$           2.21	2.123(1+0.04

P2 = D3/Ke-g

= 2.21/(0.08-0.04)

= 2.21/0.04

= 55.2

	Amount	PVF @8%	Disc CF
D1	$           1.93	0.9259	$      1.79
D2	$           2.12	0.8573	$      1.82
P2	$         55.20	0.7938	$   43.82
Value of Stock at t= 0	$   47.43

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