Question

A stock is expected to pay the following dividends: $1.3 four years from now, $1.5 five years from now, and $2 six years from now, followed by growth in the dividend of 7% per year forever after that point. There will be no dividends prior to year 4. The stock's required return is 13%. The stock's current price (Price at year 0) should be $____________.

Be specific about the process, especially on how to calculate PV. Do not round any intermediate work, but round your final answer to 2 decimal places

Answer 1

Terminal Value = 2.14/(0.13-0.07)=35.667

Year	Div	Terminal value	Total Cash flow	DF	Discounted Value
1	0		0	0.884956	0
2	0		0	0.783147	0
3	0		0	0.69305	0
4	1.3		1.3	0.613319	0.797314346
5	1.5		1.5	0.54276	0.814139904
6	2	35.66667	37.66667	0.480319	18.09199787
7	2.14
				Stock price	$          19.70

Discount factor = 1/(1.13^n) where n is the number of year
PV = Total Cash flow*Discount factor