Question

Mack Industries just paid $1.00 per share dividend (i.e., D0=$1.00). Analysts expect the company's dividend to grow 20 percent this year (i.e., D1=1$1.20), and 15 percent in the following year. After two years the dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the company's stock is 12 percent. What should be the current price of the company's stock? Show answer using excel.

Answer 1

	Required rate=	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1	20.00%	1.2		1.2	1.12	1.0714
2	1.2	15.00%	1.38	20.7	22.08	1.2544	17.60204
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	18.67
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 2 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor