Question

Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $3.80. You believe that dividends will grow at a rate of 21.0% per year for three years, and then at a rate of 9.0% per year thereafter. You expect that the stock will sell for $60.64 in three years. You expect an annual rate of return of 24.0% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now? options: $39.53 $31.55 $42.66 $26.64 $36.51

Answer 1

	Required rate=	24.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	3.8	21.00%	4.598		4.598	1.24	3.7081
2	4.598	21.00%	5.56358		5.56358	1.5376	3.61835
3	5.56358	21.00%	6.7319318	48.919	55.6509318	1.906624	29.1882
	Long term growth rate (given)=	9.00%			Value of Stock =	Sum of discounted value =	36.51

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