Question

 Lawrence​ Industries' most recent annual dividend was ​$1.22 per share ​(D0equals$ 1.22​), and the​ firm's required return is 13​%. Find the market value of​ Lawrence's shares when dividends are expected to grow at 10​% annually for 3​ years, followed by a 6​% constant annual growth rate in years 4 to infinity.

Answer 1

Market value of​ Lawrence's shares is $ 20.51

As per dividend discount model, current share price is the present value of future dividends.
Step-1:Calculation of present value of dividend of next 3 years
Year	Dividend	Discount factor	Present value
a	b	c=1.13^-a	d=b*c
1	$       1.34	0.884956	$       1.19
2	$       1.48	0.783147	$       1.16
3	$       1.62	0.69305	$       1.13
Total			$       3.47
Working;
Dividend of year:
1	=	$       1.22	*	1.1	=	$       1.34
2	=	$       1.34	*	1.1		$       1.48
3	=	$       1.48	*	1.1		$       1.62
Step-2:Present value of dividend after year 3
Present value	=	D3*(1+g)/(Ke-g)*DF3		Where,
	=	$    17.04		D3	=	$       1.62
				g	=	6%
				Ke	=	13%
				DF3	=	0.69305
Step-3:Calculation of sum of present value of future dividends
Sum of present value of future dividends	=	$       3.47	+	$    17.04
	=	$    20.51