Question

Use the appropriate excel formula to find the price of a share of common stock that...

Use the appropriate excel formula to find the price of a share of common stock that is expected to pay a dividend of $2 next year. Dividends are expected to grow at 4 percent through year 3, then at 3 percent for 2 years, and then 2 percent forever. Assume that stockholders require a 10 percent return.

Reminder: do not use excel as a calculator use the functions that are built into the program.

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Answer #1

First we compute the dividends till year 5 and the price at year 5 which is the horizon value.

Year Dividend Horizonvalue Net CF
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1 2 2
2 2.08 2.08
3 2.1632 2.1632
4 2.228096 2.228096
5 2.294939 29.26047 31.55541
6 2.340838

Share price is calculated using NPV function in excel

Share price = $26.28

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