Question

Quantitative Problem 3: Assume today is December 31, 2019. Imagine Works Inc. just paid a dividend of $1.10 per share at the end of 2019. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 6% annually. The company's cost of equity (r_s) is 9%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2019)? Do not round intermediate calculations. Round your answer to the nearest cent.
$   per share

Answer 1

	Required rate=	9.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.1	18.00%	1.298		1.298	1.09	1.1908
2	1.298	18.00%	1.53164		1.53164	1.1881	1.28915
3	1.53164	18.00%	1.8073352	63.859	65.6663352	1.295029	50.70646
	Long term growth rate (given)=	6.00%			Value of Stock =	Sum of discounted value =	53.19
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor