Question

A firm’s most recent dividend was $2.00. The firm is expected to grow at 12% for the next 5 years, and then grow forever at 8%. The required rate of return on equity (i.e. the discount rate) is 14%. Find today’s stock price.

Answer #1

D1=(2*1.12)=$2.24

D2=(2.24*1.12)=$2.5088

D3=(2.5088*1.12)=$2.809856

D4=(2.809856*1.12)=$3.14703872

D5=(3.14703872*1.12)=$3.524683366

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(3.524683366*1.08)/(0.14-0.08)

=$63.4443006

Current stock price=Future dividends*Present value of discounting factor(14%,time period)

=$2.24/1.14+$2.5088/1.14^2+$2.809856/1.14^3+$3.14703872/1.14^4+$3.524683366/1.14^5+$63.4443006/1.14^5

which is equal to

=**$42.44(Approx).**

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