Question

Microsoft has just paid a dividend of $1 per share (this dividend is already paid sometimes called Dividend 0). It is estimated that the companys dividend will grow at a rate of 35% in year 1 and 20% in year 2. The dividend is then expected to grow at a constant rate of 7% thereafter. The companys opportunity cost of capital is 11% what is an estimate Microsofts stock using the nonconstant growth technique?

Answer 1

Microsofts stock = $45.866

Step-by-step explanation:

The price of a stock using the dividend valuation model is the present value of the the future dividend expected from the stock discounted at the required rate of return.

This model would be applied as follows:

Year Present Value

1 1× 1.35^1 × 1.11^(1-) = 1.2162

2 1 × 1.35^1 × 1.20 × 1.11^(-2) = 1.314

Present value of Dividend in Year 3 and beyond

This will be done in two steps

Step 1

PV in year 2 terms

= Dividend in year 3 × (1.07)/(0.11-0.07)

1 × 1.35^1 × 1.20 × 1.07/(0.11-0.07)=43.335

PV in year 0 terms =

PV in year 2 × 1.11^(-2)

=43.335 × 1.11^(-2)=

Value of stock =

Value of stock = 1.2162 + 1.314 + 43.335 = 45.866

Microsofts stock = $45.866