Question

#2 A stock just paid a dividend of $1.65. The dividend is expected to grow at 20.50% for five years and then grow at 4.63% thereafter. The required return on the stock is 10.40%. What is the value of the stock? Submit Answer format: Currency: Round to: 2 decimal places. unanswered not_submitted

Answer 1

Dividend just paid =1.65
Dividend in year 1=1.65*(1+Growth)=1.65*(1+20.5%)= 1.98825

Dividend in year 2=1.65*(1+20.5%)*(1+20.5%)= 2.39584125

Dividend in year 3=1.65*(1+20.5%)*(1+20.5%)*(1+20.5%)=2.8869887

Dividend in year 4=1.65*(1+20.5%)*(1+20.5%)*(1+20.5%)*(1+20.5%)=3.47882139

Dividend in year 5=1.65*(1+20.5%)*(1+20.5%)*(1+20.5%)*(1+20.5%)*(1+20.5%)=4.191979776

Price beyond year 5 is equal to [(Dividend in year 5)*(1+Constant growth rate)]/(Required return-constant growth rate)
=4.191979776*(1+4.63%)/(10.40%-4.63%)
=4.38606844/0.0577
=76.01505

Current price=(Dividend in year 1)/(1+Required return)^1+(Dividend in year 2)/(1+Required return)^2+(Dividend in year 3)/(1+Required return)^3+(Dividend in year 4)/(1+Required return)^4+(Dividend in year 5)/(1+Required return)^5+(Price beyond year 5)/(1+Required return)^5

=(1.98825)/(1+10.40%)^1+(2.39584125)/(1+10.40%)^2+(2.8869887)/(1+10.40%)^3+(3.47882139)/(1+10.40%)^4+(4.191979776)/(1+10.40%)^5+(76.01505)/(1+10.40%)^5

=1.800951087+1.965712011+2.145546166+2.34183255+2.55607629+46.35047814
=57.16059624 or $57.16 (Rounded to two decimal places)

Value of the stock=$57.16