Question

Janzy shares are currently selling at $5.50 each. Last year's dividends were $0.55 per share. The dividends are expected to grow at 7.5% per year for the next two years and then at a more gradual rate of 6% a year indefinitely. You wish to earn a return of 10% per year. Determine the value of the stock today. (Please explain the answer in detail, thank you)

(pls attach all the formulas used) (No excel ans and formulas)

Answer 1

Answer:

Last Year Dividend, D0 = $0.55

Growth rate for next 2 years is 7.50% and a constant growth rate (g) of 6%

D1 = $0.55000 * 1.075
D1 = $0.59125

D2 = $0.59125 * 1.075
D2 = $0.63559

D3 = $0.63559 * 1.060
D3 = $0.67373

Required Return, r = 10%

P2 = D3 / (r - g)
P2 = $0.67373 / (0.10 - 0.06)
P2 = $16.84325

P0 = $0.59125/1.10 + $0.63559/1.10^2 + $16.84325/1.10^2
P0 = $14.98

So, value of the stock today is $14.98