Question

Mersck is currently paying a dividend of $2. Its dividend growth rate will be 12% next year and will then drop to 7% for the foreseeable future. The discount rate of Mersck is 13%. What is the stock price of Mersck?

	a.	$37.33
	b.	$42.68
	c.	$38.15
	d.	$40.25
	e.	$33.33

Answer 1

	Required rate=	13.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2	12.00%	2.24	39.9467	42.1867	1.13	37.3334
	Long term growth rate (given)=	7.00%			Value of Stock =	Sum of discounted value =	37.33

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 1 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor