Question

CX Enterprises has the following expected​ dividends: $ 1.03 in one​ year, $ 1.23 in two​ years, and $ 1.33 in three years. After​ that, its dividends are expected to grow at 3.5 % per year forever​ (so that year​ 4's dividend will be 3.5 % more than $ 1.33 and so​ on). If​ CX's equity cost of capital is 12 %​, what is the current price of its​ stock?

Answer 1

	Required rate=	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	1.03		1.03	1.12	0.9196
2	1.03	0.00%	1.23		1.23	1.2544	0.98055
3	1.23	0.00%	1.33	16.195	17.525	1.404928	12.47395
	Long term growth rate (given)=	3.50%			Value of Stock =	Sum of discounted value =	14.37

Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor