Question

Vandelay Industries just paid a dividend of $2.50 that they will grow by 30% per year...

Vandelay Industries just paid a dividend of $2.50 that they will grow by 30% per year for the next three years, then at a constant 6% per year. If you require an 8% return, what is the most you would be willing to pay for the stock today?

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Answer #1
Required rate= 8.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 2.5 30.00% 3.25 3.25 1.08 3.0093
2 3.25 30.00% 4.225 4.225 1.1664 3.62226
3 4.225 30.00% 5.4925 291.103 296.5955 1.259712 235.44707
Long term growth rate (given)= 6.00% Value of Stock = Sum of discounted value = 242.08
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 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
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