Question

Mountain Sky Inc. announced today it will grow its dividend by 30% for the next 2 years and then it's growth will continue indefinitely at 3% thereafter. Mountain Sky is expected to pay dividend in one year of $5. If you believe the appropriate required rate of return on the stock is 15% what would you be willing to pay for the stock?

Answer 1

Price = PV of CFs from it.

Div Calculation:

Year	CF	Formula	Calculation
1	$      5.00	Given	NR
2	$      6.50	D1(1+g)	5*1.30
3	$      8.45	D2(1+g)	6.5*1.3
4	$      8.70	D3(1+g)	8.45*1.03

P3 = D4 / [ Ke - g ]

D4 = Div after 4 Years

Ke = Required ret

g = Growth Rate

P3 = D4 / [ Ke - g ]

= 8.70 / [ 15% - 3% ]

= 8.70 / 12%

= $ 72.5

P0 :

Year	Particulars	CF	PVF @15%	Disc CF
1	D1	$      5.00	0.8696	$      4.35
2	D2	$      6.50	0.7561	$      4.91
3	D3	$      8.45	0.6575	$      5.56
3	P3	$      8.70	0.6575	$      5.72
Price of Stock				$   20.54