Question

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $2.70 per share. What is the current value of one share of this stock if the required rate of return is 8.20 percent?

Answer 1

year	Dividend	PVF 8.2%	Dividend *PVF
1	2.7(1+.20)= 3.24	.92421	2.9944
2	3.24(1+.20)= 3.888	.85417	3.3210
3	3.888(1+.20)=4.6656	.78944	3.6832
4	4.6656(1+.2)= 5.5987	.72961	4.0849
4	138.6345	.72961	101.1491
Current price of stock			115.23

**Terminal value at year 4 = D4(1+g)/(Rs-g)

                = 5.5987(1+.04)/(.082-.04)

                     5.5987*1.04 /.042

                     138.6345