Question

2) Vega Inc. expects earnings/dividends to grow at an annual rate of 20 percent for the next 2 years. This growth rate is expected to drop to 10 percent a year for a further three years after which the company settles into a constant growth pattern of 4 percent per year indefinitely. If current dividend is $1.10 per share and investors require a 15 percent annual return on Vega stock, what is a fair price for a share of Vega's stock today?

Answer 1

Price of Stock = PV of Cash flows from it.

Div Calculation:

Year	CF	Formula	Calculation
1	$      1.32	D0(1+g)	1.10(1.20)
2	$      1.58	D1(1+g)	1.32(1.20)
3	$      1.74	D2(1+g)	1.58(1.1)
4	$      1.92	D3(1+g)	1.74(1.1)
5	$      2.11	D4(1+g)	1.92(1.1)
6	$      2.19	D5(1+g)	2.11(1.04)

P5 = D6 / [Ke -g '

= $2.19 / [ 15% - 4 %]

= $2.19 / 11%

= $19.93

P0 Calculation:

Year	Particulars	CF	PVF @15%	Disc CF
1	D1	$      1.32	0.8696	$      1.15
2	D2	$      1.58	0.7561	$      1.20
3	D3	$      1.74	0.6575	$      1.15
4	D4	$      1.92	0.5718	$      1.10
5	D5	$      2.11	0.4972	$      1.05
5	P5	$   19.93	0.4972	$      9.91
Price of Stock				$   15.54