A stock just paid a dividend of $2.19. The dividend is expected to grow at 20.58% for two years and then grow at 4.84% thereafter. The required return on the stock is 13.12%. What is the value of the stock?
The value of the stock is computed as shown below:
= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + 1 / (1 + required rate of return)2 [ ( Dividend in year 2 (1 + growth rate) / ( required rate of return - growth rate) ]
= ($ 2.19 x 1.2058) / 1.1312 + ($ 2.19 x 1.20582) / 1.13122 + 1 / 1.13122 [ ( $ 2.19 x 1.2058 x 1.0484) / ( 0.1312 - 0.0484) ]
= $ 2.640702 / 1.1312 + $ 3.184158472 / 1.13122 + $ 40.31729157 / 1.13122
= $ 36.33 Approximately
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