Question

A rapidly growing company just paid a dividend of $1.50 a share. For the next three years, the earnings growth rate is projected to be 15% each year, and then 4% each year thereafter. If the required rate of return is 9%, what is the value of the stock?

A)$35.15 B)$38.63 C)$43.88 D)$41.65

Answer 1

Solution :

The value of the stock = $ 41.65

Thus the solution is Option D = $ 41.65

Note :

The dividend calculation for each year is as follows :

D₁ = D₀ * ( 1 + g ) = 1.50 * ( 1 + 0.15 ) = 1.50 * 1.15 = 1.7250

D₂ = D₁ * ( 1 + g ) = 1.7250 * ( 1 + 0.15 ) = 1.7250 * 1.15 = 1.9838

D₃ = D₂ * ( 1 + g ) = 1.9838 * ( 1 + 0.15 ) = 1.9838 * 1.15 = 2.2814

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.