Question

the last dividend paid by coppard inc. was $1.25. the dividend growth rate is expected to be constant at 35% for 3 years, after which dividends are expected to grow at a rate of 6% forever. if the firms required return rate is 11%, what is its current stock price?

Answer 1

Terminal value is the present value of dividends for year 4 and beyond. it's calculated at the end of year 3. so, it will be discounted for 3 years only.

Terminal value = [Year 3 dividend*(1+perpetual growth rate)]/(required return - perpetual growth rate)

perpetual growth rate is the dividend growth rate of 6% forever.

its current stock price is $53.29.

Year	Required Return	Dividend growth rate	Dividend	Terminal value	PV of dividends & Terminal value
0	11%		$1.25
1	11%	35%	$1.69		$1.52
2	11%	35%	$2.28		$1.85
3	11%	35%	$3.08	$65.20	$49.92
4 & beyond	11%	6%	$3.26
Current Stock price					$53.29

Calculations