Question

A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a rate of 15 percent for the next 3 years. Afterwards, a more stable 6 percent growth rate can be assumed. If a 10 percent discount rate is appropriate for this stock, what is its value?

Answer 1

The Value of stock is $33.56

Step-by-step explanation:

First we need to calculate the dividend for each year

Year _________________________ Dividend

1 _____( $1 x ( 1 + 15% )^1____________$1.15

2_____( $1 x ( 1 + 15% )^2___________ $1.3225

3_____( $1 x ( 1 + 15% )^3___________ $1.5209

4_____( $1.5209 x ( 1 + 6% )________ $1.6122

Calculate the present value of each year's dividend

Year ____________________________ Present value

1 _____( $1.15 / ( 1 + 10% )^1 ___________ $1.0455

2_____$1.3225 / ( 1 + 10% )^2__________ $1.0930

3_____$1.5209 / ( 1 + 10% )^3__________ $1.1427

4_____$1.6122 / ( 10% - 6% ) / ( 1 + 10% )^3_$30.2817

Total _____________________________$33.5629

Hence priec of the stock is $33.56