Question

Massey Motors is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 10% a year for the next 3 years and then decreasing the growth rate to 4% per year. The company just paid its annual dividend in the amount of 1.00 per share. What is the current value of one stock if the required rate of return is 13.75?

Please include steps/ formulas involved for this problem

Answer 1

	Required rate=	13.75%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1	10.00%	1.1		1.1	1.1375	0.967
2	1.1	10.00%	1.21		1.21	1.29390625	0.93515
3	1.21	10.00%	1.331	14.197	15.528	1.471818359	10.55021
	Long term growth rate (given)=	4.00%			Value of Stock =	Sum of discounted value =	12.45
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