Question

Robotic Atlanta Inc. just paid a dividend of $4.00 per share (that is, D0 = 4.00). The dividends of Robotic Atlanta are expected to grow at a rate of 20 percent next year (that is, g1 = .20) and at a rate of 10 percent the following year (that is, g2 = .10). Thereafter (i.e., from year 3 to infinity) the growth rate in dividends is expected to be 5 percent per year. Assuming the required rate of return on Robotic Atlanta stock is 14 percent, compute the current price of the stock. (Round your answer to 2 decimal places and record your answer without dollar sign or commas).

Answer 1

	Required rate=	14.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	4	20.00%	4.8		4.8	1.14	4.2105
2	4.8	10.00%	5.28	61.6	66.88	1.2996	51.46199
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	55.67

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor