A stock just paid a dividend of $2.68. The dividend is expected to grow at 24.72%...

A stock just paid a dividend of $2.68. The dividend is expected to grow at 24.72% for three years and then grow at 3.24% thereafter. The required return on the stock is 14.55%. What is the value of the stock?

Expert Solution

we have to use dividend discount model to compute the terminal value
Price today is the present value of future cash flow

i	ii		iii=i+ii	iv	v	vi=iv*v
year	Dividend		Terminal value	total cash flow	PVIF @ 14.55%	present value
1	3.3425	2.68*124.72%		3.34	0.8730	2.92
2	4.1688	3.3425*124.72%		4.17	0.7621	3.18
3	5.1993	4.1688*124.72%	47.46	52.66	0.6653	35.03

						41.13

Terminal value = Divided in year 4/(required rate - growth rate)
			5.1993*103.24%/(14.55%-3.24%)
			47.46

Price today =					$ 41.13

Ans =						$ 41.13

jeff jeffy answered 3 years ago

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