Question

The Bausch Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, $.30, and $.40 over the next 7 years, respectively. After that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the stock when it reaches constant growth in year:

Answer 1

YEAR 8

The first step is the computation of  the horizon value of the stock, which is also known as the terminal value. Terminal value is the value of the stock at a year in which the dividends starts growing at a constant growth rate.

Here, in the given question, the dividends are growing at a constant rate from YEAR 8 . Hence, the terminal value will be computed at year 8. Then the terminal value along with the dividends of first 7 years shall be discounted and converted into the Present Value terms.