Question

A stock is expected to pay the following dividends: $1.1 four years from now, $1.4 five years from now, and $1.9 six years from now, followed by growth in the dividend of 8% per year forever after that point. There will be no dividends prior to year 4. The stock's required return is 14%. The stock's current price (Price at year 0) should be $____________.

Answer 1

Value after year 6=(D6*Growth Rate)/(Required return-Growth Rate)

=(1.9*1.08)/(0.14-0.08)

=$34.2

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

=1.1/1.14^4+1.4/1.14^5+1.9/1.14^6+34.2/1.14^6

which is equal to

=$17.83(Approx).