Question

Coke expects dividends to grow at a rate of 30% for two years, 10% for the third year, and 3% per year indefinitely into the future. The most recent dividend was $4.50 per share. The market requires a 14% rate of return on stocks similar in risk to Coke. Estimate the current price of this stock

Answer 1

Answer = $ 69.50

Note:

1. Price = present Value of dividends + present value of Price at year 3

= 16.63+52.87

= 69.50

2. Price at year 3 = Expected dividend / ( required return -growth rate)

= (8.37*1035) /(14%-3%)

= $ 78.33150

Present Value of Price at year 3 = Price at year 3 * Discounting Factor (rate, time)

= $ 78.33150 * 0.6749715162020160

= $ 52.87

Year	Dividend	Discounting Factor(14%)	Present Value
0	4.50
1	5.85	0.8771929824561400	5.13
2	7.61	0.7694675284702990	5.85
3	8.37	0.6749715162020160	5.65
Present Value of Dividends			16.63