Question

You forecast a company's dividends for the next four years. In Year 1, you expect to receive $1.00 in dividends. In Year 2, you expect to receive $1.10 in dividends. In Year 3, you expect to receive $1.20 in dividends. In Year 4, you expect to receive $1.30. After Year 4, dividends are expected to grow at 2%. The rate of return for similar risk common stock is 7%. What is the current value of this company's stock? 

Answer 1

Step 1: Computation of market price at the end of year 4 using Gordon Growth Model

P4 = D5 / (Ke – g)

Where,

P4 - Market price at the end of year 4 =?

D5 - Expected dividend in year 5 = 1.3*1.02 = 1.326

Ke – Cost of equity = 7%

G – Growth rate in dividend = 2%

P4 = 1.326/(.07-.02)

= 1.326/.05

= $26.52

Step 2: Computing current share price by discounting the cashflow at required return

Year	Dividend	PVF@7%	Present Value (Cashflow*PVF)
1	1.00	0.935	0.93
2	1.10	0.873	0.96
3	1.20	0.816	0.98
4	27.82(1.3+26.52)	0.763	21.22

current share price = Cashflow*PVF

= .93+.96+.98+21.22

= $24.09

You can use the equation 1/(1+i)^n to find PVF using calculator