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A stock just paid a dividend of $2.32. The dividend is expected to grow at 28.59%...

A stock just paid a dividend of $2.32. The dividend is expected to grow at 28.59% for five years and then grow at 4.24% thereafter. The required return on the stock is 10.75%. What is the value of the stock?

Please shows steps in a financial calculator.

Expert Solution

Step 1: Computation of market price at the end of year 5 using Gordon Growth Model

P5 = D6 / (Ke – g)

Where,

P5 - Market price at the end of year 5 =?

D6 - Expected dividend in year 6 = 2.32*1.2859^5*1.0424 = 8.50272962229

Ke – Cost of equity = 10.75%

G – Growth rate in dividend = 4.24%

P5 = 8.50272962229/(.1075-.0424)

= 8.50272962229/0.0651

= 130.61

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

Year	Dividend	[email protected]%	*Present Value (CashflowPVF)**
1	2.98	0.903	2.69
2	3.84	0.815	3.13
3	4.93	0.736	3.63
4	6.34	0.665	4.22
5	138.77(6.34*1.2859+130.61)	0.600	83.29

current share price = Cashflow*PVF

= 2.69+3.13+3.63+4.22+83.29

= $96.95

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

jeff jeffy answered 8 months ago

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