Question

1. Given the information in the table, what is the dividend yield from t=0 to t=1?

Today’s Dividend	$3.11
Discount Rate	7.96%
Growth rate in dividends 0 to 1	6.21%
Growth rate in dividends 1 to 2	9.48%
Growth rate in dividends 2 to 3	5.63%
Growth rate in dividends 3 onward	3.28%

2.

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

Today’s Dividend	$3.46
Discount Rate	9.32%
Growth rate in dividends 0 to 1	8.87%
Growth rate in dividends 1 to 2	6.76%
Growth rate in dividends 2 to 3	6.61%
Growth rate in dividends 3 onward	3.09%

Answer 1

Part 1:

Div Calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     3.30	D0 ( 1 + g)	3.11 ( 1 + 0.0621 )
2	$                     3.62	D1 ( 1 + g)	3.3 * ( 1 + 0.0948 )
3	$                     3.82	D2 ( 1 + g)	3.62 * ( 1 + 0.0563 )
4	$                     3.95	D3 ( 1 + g)	3.82 * ( 1 + 0.0328 )

Price after 3 Years:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 3.95 / [ 7.96 % - 3.28 % ]
= $ 3.95 / [ 4.68 % ]
= $ 84.3
P3 - Price after 3 Years

D4 - DIv after 4 Years

Ke - Required Ret

g - Growth Rate

Price Today:

Year	Particulars	Cash Flow	PVF @7.96 %	Disc CF
1	D1	$      3.30	0.9263	$              3.06
2	D2	$      3.62	0.8580	$              3.10
3	D3	$      3.82	0.7947	$              3.04
3	P3	$   84.30	0.7947	$           66.99
Price				$           76.19

Price today is $ 76.19

Div Yield = Expected Div /Price Today

= $ 3.30 / $ 76.19

= 0.0433

I.e 4.33%

Part 2:

Div Calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     3.77	D0 ( 1 + g)	3.46 ( 1 + 0.0887 )
2	$                     4.02	D1 ( 1 + g)	3.77 * ( 1 + 0.0676 )
3	$                     4.29	D2 ( 1 + g)	4.02 * ( 1 + 0.0661 )
4	$                     4.42	D3 ( 1 + g)	4.29 * ( 1 + 0.0309 )

Price after 3 Years:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 4.42 / [ 9.32 % - 3.09 % ]
= $ 4.42 / [ 6.23 % ]
= $ 70.94
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 @9.32%	PV of CFs
2	D2	$      4.02	0.9147	$      3.68
3	D3	$      4.29	0.8368	$      3.59
3	P3	70.94	0.8368	$   59.36
Price after 1 Year				$   66.63