Question

Given the information in the table, what is the price of the stock in YEAR 1?

Today’s Dividend	$3.19
Discount Rate	7.45%
Growth rate in dividends 0 to 1	7.12%
Growth rate in dividends 1 to 2	7.25%
Growth rate in dividends 2 to 3	5.40%
Growth rate in dividends 3 onward	4.65%

Please do on piece of paper or show work and not on excel so i can follow.

Answer 1

Price of stock = PV of future CFs from it.

Price at the end of Year 1 = PV of future CFs from Year 2.

Div Calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     3.42	D0 ( 1 + g)	3.19 ( 1 + 0.0712 )
2	$                     3.66	D1 ( 1 + g)	3.42 * ( 1 + 0.0725 )
3	$                     3.86	D2 ( 1 + g)	3.66 * ( 1 + 0.054 )
4	$                     4.04	D3 ( 1 + g)	3.86 * ( 1 + 0.0465 )

Price at the end of Year 3:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 4.04 / [ 7.45 % - 4.65 % ]
= $ 4.04 / [ 2.8 % ]
= $ 144.37
P3 - Price after 3 Years

D4 - DIv after 4 Years

Ke - Required Ret

g - Growth Rate

Price after 1 Year:

Year	Particulars	Cash Flow	PVF @7.45%	PV of CFs
2	D2	$      3.66	0.9307	$      3.41
3	D3	$      3.86	0.8661	$      3.34
3	P3	$ 144.37	0.8661	$ 125.04
Price after 1 Year				$ 131.79

Price after 1 year is $ 131.79