Question

The next dividend for ABC Corp. is expected to be $ 1.24. It will rise to $ 2.47 the next year and grow at a constant 6.2 % from then on. The required return is 12.4 %. What is the current price of the​ stock?

Answer 1

Current price of stock is $ 36.55

Working:

As per dividend discount model, current price of stock is the sum of present value of future dividends.
Step-1:Present value of dividend of first 2 years
Year	Dividend	Discount factor	Present value
a	b	c=1.124^-a	d=b*c
1	$       1.24	0.88968	$       1.10
2	$       2.47	0.79153	$       1.96
Total			$       3.06
Step-2:Present value of dividend after year 2
Present value	=	D2*(1+g)/(Ke-g)*DF2		Where,
	=	$    33.49		D2	=	Dividend of year 2	=	$       2.47
				g	=	Growth rate in dividend	=	6.20%
				Ke	=	Required return	=	12.40%
				DF2	=	Discount factor of year 2	=	0.79153
Step-3:Calculation of sum of present value of future dividends
Sum of present value of future dividends	=	$       3.06	+	$    33.49
	=	$    36.55