Question

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?

Answer 1

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).