Question

$29.25 DO Cost of Equity gl bn bi b an + b 3 b $2.00 | 15.00% 10.00% 10.00% 10.00% 10.00% D4 10.00% 10.00% 10.00% 10.00% D8 10.00% 10.00% D10 5.00% P10 D5 b D6 $2.20 $2.42 $2.66 $2.93 $3.22 $3.54 $3.90 $4.29 $4.72 $5.19 $54.47 87 g8 89 D9 810

1) What is the value today of KTS stock if it grows at 10% for 5 years, then 8% for 3 years, then 6% for 2 years and then grows at 5% thereafter?

Answer 1

	Required rate=	15.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2	10.00%	2.2		2.2	1.15	1.913
2	2.2	10.00%	2.42		2.42	1.3225	1.82987
3	2.42	10.00%	2.662		2.662	1.520875	1.75031
4	2.662	10.00%	2.9282		2.9282	1.74900625	1.67421
5	2.9282	10.00%	3.22102		3.22102	2.011357188	1.60142
6	3.22102	8.00%	3.4787016		3.4787016	2.313060766	1.50
7	3.4787016	8.00%	3.756997728		3.756997728	2.660019881	1.41239
8	3.756997728	8.00%	4.057557546		4.057557546	3.059022863	1.32642
9	4.057557546	6.00%	4.301010999		4.301010999	3.517876292	1.22262
10	4.301010999	6.00%	4.559071659	47.87	52.42907166	4.045557736	12.95966
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	27.19
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 10 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor