Question

A stock just paid a dividend of $1.02. The dividend is expected to grow at 21.89% for two years and then grow at 4.40% thereafter. The required return on the stock is 14.12%. What is the value of the stock?

Answer 1

Value of stock is $ 14.75

As per dividend discount method, current share price is the present value of future dividends.
Step-1:Present value of dividend of non-constant growth years
Year	Dividend	Discount factor	Present value
a	b	c=1.1412^-a	d=b*c
1	$       1.24	0.8763	$       1.09
2	$       1.52	0.7679	$       1.16
Total			$       2.25
Working;
Dividend of Year :
1	=	$       1.02	*	1.2189	=	$       1.24
2	=	$       1.24	*	1.2189	=	$       1.52
Step-2:Calculation of terminal value of dividend at the end of non-constant growth years
Terminal value	=	D3*(1+g)/(Ke-g)*DF3		Where,
	=	$    12.50		D2(Dividend of year 2)	=	$       1.52
				g (Growth rate in dividend)	=	4.40%
				2	=	14.12%
				DF2 (Discount factor of year 2)	=	0.7679
Step-3:Sum of present value of future dividends
Sum of present value of future dividends	=	$       2.25	+	$    12.50
	=	$    14.75
So, current share price is		$    14.75