Question

Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 18 percent per year for the next 12 years before leveling off at 4 percent into perpetuity. The required return on the company’s stock is 11 percent. If the dividend per share just paid was $1.64, what is the stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Terminal value is the present value of dividend per share for year 13 and beyond. it is calculated at the end of year 12. so, it will be discounted for 12 years only.

the stock price is $80.70.

Year	Required Return	Dividend growth rate	Dividend	Terminal value	PV of dividends & Terminal value
0	11%		$1.64
1	11%	18%	$1.94		$1.74
2	11%	18%	$2.28		$1.85
3	11%	18%	$2.69		$1.97
4	11%	18%	$3.18		$2.09
5	11%	18%	$3.75		$2.23
6	11%	18%	$4.43		$2.37
7	11%	18%	$5.22		$2.52
8	11%	18%	$6.16		$2.67
9	11%	18%	$7.27		$2.84
10	11%	18%	$8.58		$3.02
11	11%	18%	$10.13		$3.21
12	11%	18%	$11.95	$177.57	$54.17
13 & beyond	11%	4%	$12.43
Stock price					$80.70

Calculations