Question

Victoria’s Sporting Goods, Inc. forecasts dividend payments for the next 4 years of $3.44, $4.07, $5.67, and $7.28 (respectively) based on market demand for its products. After four years, the company expects to grow at a more moderate rate of 3.10% indefinitely. If investors expect a return of 10.35% on their investment, what is the likely price of the stock today? (Do not round intermediate steps. Round your final answer to two decimal places.)

Answer 1

Value after year 4=(D4*Growth Rate)/(Expected Return-Growth Rate)

=(7.28*1.031)(0.1035-0.031)

$103.5266207

Hence current price=Future dividends*Present value of discounting factor(rate%,time period)

=3.44/1.1035+4.07/1.1035^2+5.67/1.1035^3+7.28/1.1035^4+103.5266207/1.1035^4

=$85.41(Approx).