Question

Assume Stanton Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. The firm’s equity cost of capital is 8%. Use the dividend-discount model to answer the following questions. What is the value of a share of Stanton stock now? If the firm’s share price is currently trading at $13, will you sell or buy the shares?

Answer 1

Annual Dividend , D1 = $ 0.65

Growth Rate , G = 12% upto Fifth Year and 2 % thereafter

Cost of Equity Ke = 8%

When Growth Rate is not stable, Value of Share will be calculated as Follows-

Where, D denotes dividend of respective years and Pn denotes Price of stock in year from which growth is stable

Calculation of D1 - D6

Year (n)	Growth Rate	D(n-1)	D(n)
1	12%	-	0.650
2	12%	0.650	0.728
3	12%	0.728	0.815
4	12%	0.815	0.913
5	12%	0.913	1.023
6	2%	1.023	1.043
7	2%	1.043	1.064

Calculation of P6 i.e, Price in 6th Year

=

=

= $ 17.733

NOW Calculation of P0

=

=

= 15.072