Question

# Thirsty Cactus Corp. just paid a dividend of \$1.20 per share. The dividends are expected to...

Thirsty Cactus Corp. just paid a dividend of \$1.20 per share. The dividends are expected to grow at 25 percent for the next 9 years and then level off to a 6 percent growth rate indefinitely. Required : If the required return is 14 percent, what is the price of the stock today?

D1=(1.2*1.25)=\$1.5

D2=(1.25*1.25)=\$1.875

D3=(1.875*1.25)=\$2.34375

D4=(2.34375*1.25)=\$2.9296875

D5=(2.9296875*1.25)=\$3.662109375

D6=(3.662109375*1.25)=\$4.577636719

D7=(4.577636719*1.25)=\$5.722045898

D8=(5.722045898*1.25)=\$7.152557373

D9=(7.152557373*1.25)=\$8.940696716

Value after year 9=(D9*Growth rate)/(Required return-Growth rate)

=(8.940696716*1.06)/(0.14-0.06)

=\$118.4642315

Current price=Future dividends*Present value of discounting factor(14%,time period)

=\$1.5/1.14+\$1.875/1.14^2+\$2.34375/1.14^3+\$2.9296875/1.14^4+\$3.662109375/1.14^5+\$4.577636719/1.14^6+\$5.722045898/1.14^7+\$7.152557373/1.14^8+\$8.940696716/1.14^9+\$118.4642315/1.14^9

which is equal to

=\$54.03(Approx).

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