Question

DesJarlais Inc just paid an annual dividend of $4.65. You expect dividends to grow at 18% for the next two years, then at a sustainable 4.75% after that. The expected return on the stock is 10.29%. The per share value of DesJarlais is closest to:

A) $110.94. this is answer

B) $132.72.

C) $101.55.

Period	1	2	3+
Div	4.65(1.18)	4.65(1.18)2	4.65(1.18)2(1.0475)
PV @ 10.29%	4.9751	5.3229	122.4225 (TV)
PV of TV			100.6442
Total			110.94

Please, can anybody help me how my professor got this answer and which formula she used? step by step calculation.

Answer 1

let me know if you need any clarification..

Price of the bond = present vlaue of future cash flow
	i		ii	iii=i+ii	iv		v=iii*iv
year	Dividend		Terminal value	Total cash flow	PVIF @ 10.29%		present value
1	5.487	=4.65*118%		5.487	0.906701	=1/1.1029	4.98
2	6.47466	=4.65*118%*118%	122.42	128.90	0.822106	=0.906701/1.1029	105.97
							110.94
computation of year 2 terminal value =			Expected dividend in year 3/(required rate - growth rate)
			=6.47466*104.75%/(10.29%-4.75%)
			122.4225