Question

If 1) the expected return for XYZ stock is 9.5 percent; 2) the dividend is expected
to be $4.38 in one year, $4.62 in two years, $0 in three years, and $3.81 in four years; and 3) after the dividend is paid in four years, the dividend is expected to begin growing by 4.5 percent a year forever, then what is the current price of one share of the stock?
   a.   An amount less than $64.40
   b.   An amount between $64.40 and just less than $65.40
   c.   An amount between $65.40 and just less than $66.40
   d.   An amount between $66.40 and just less than $67.40
   e.   An amount equal to or greater than $67.40

Answer 1

	Required rate=	9.50%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	4.38		4.38	1.095	4
2	4.38	0.00%	4.62		4.62	1.199025	3.85313
3	4.62	0.00%	0		0	1.312932375	0
4	0	0.00%	3.81	79.629	83.439	1.437660951	58.03802
	Long term growth rate (given)=	4.50%			Value of Stock =	Sum of discounted value =	65.89
Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

   c.   An amount between $65.40 and just less than $66.40