Question

Given the information in the table, what is the price of the stock in YEAR 1?

Today’s Dividend	$4.62
Discount Rate	9.31%
Growth rate in dividends 0 to 1	9.58%
Growth rate in dividends 1 to 2	6.56%
Growth rate in dividends 2 to 3	5.79%
Growth rate in dividends 3 onward	3.34%

Answer 1

Price of stock = PV of CFs from it.

Price after 1 Year:

Div calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     5.06	D0 ( 1 + g)	4.62 ( 1 + 0.0958 )
2	$                     5.39	D1 ( 1 + g)	5.06 * ( 1 + 0.0656 )
3	$                     5.71	D2 ( 1 + g)	5.39 * ( 1 + 0.0579 )
4	$                     5.90	D3 ( 1 + g)	5.71 * ( 1 + 0.0334 )

Price after 3 years:

Price after 3 Years = D4 / [ Ke - g ]

D4 - DIv after 4 Years

Ke - Required Ret

g - Growth Rate

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 5.9 / [ 9.31 % - 3.34 % ]
= $ 5.9 / [ 5.97 % ]
= $ 98.79

Price after 1 Year:

Price = PV of future CFs

Year	Cash flow	PVF @9.31%	PV of CFs
2	$      5.39	0.914829	$      4.93
3	$      5.71	0.836913	$      4.78
3	$   98.79	0.836913	$   82.68
Price after 1 Year			$   92.39