Question

Hart Enterprises recently paid a dividend of $1.25. It expects to have a dividend growth rate of 15% for 3 years followed by a constant rate of 6% thereafter. The firm’s required return is 10%. What is the firm’s stock value today?

Answer 1

Value of stock = $41.95

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.

Year Present Value

1 1.25× 1.15^1 × 1.1^(1-) =1.3068

2 1.25× 1.15^2 × 1.1^(-2) = 1.366

3. 1.25× 1.15^3 × 1.1^(-3)= 1.4283

Present value of Dividend in Year 4 and beyond

This will be done in two steps

Step 1

PV in year 3 terms

= Dividend in year 4× (1.06)/(0.1-0.06)

1.25× 1.15^3 × 1.06/(0.1-0.06)=50.37898438

PV in year 0 terms =

PV in year 3 × 1.1^(-3)

=50.3789 × 1.1^(-3)= 37.8504

Value of stock = 1.3068 + 1.366 + 1.4283 = 41.95

Value of stock = $41.95