Question

Thirsty Cactus Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow at 35 percent for the next 9 years and then level off to a 8 percent growth rate indefinitely.

   

Required :

If the required return is 14 percent, what is the price of the stock today?

Answer 1

Price of stock at 9^th year end = (Current dividend x (1+Growth rate first 9 years)^9) x (1+ Growth rate after 9 years)/(Required rate – Growth rate after 9 years)

Price of stock at 9^th year end =(1.3*(1+35%)^9)*(1+8%)/(14%-8%)

Price of stock* at 9^th year end = 348.51

Now, we can make present value table to get discounted value or present value of cash flows which will be equal to today’s stock price:

Year	Growth	Dividend Cash flow	Price of stock*	Net flow	Discounting = Df = 14%	Present value
		D = Current dividend*(1+Growth)^Year	P	NF = D+P	Df = 1/(1+Rate)^Year	=NF*Df
1	35.00%	1.76		1.76	0.877193	1.539
2	35.00%	2.37		2.37	0.769468	1.823
3	35.00%	3.20		3.20	0.674972	2.159
4	35.00%	4.32		4.32	0.592080	2.557
5	35.00%	5.83		5.83	0.519369	3.028
6	35.00%	7.87		7.87	0.455587	3.585
7	35.00%	10.62		10.62	0.399637	4.246
8	35.00%	14.34		14.34	0.350559	5.028
9	35.00%	19.36	348.51	367.88	0.307508	113.125
				Total = Value of stock today =		137.09

Current stock price = $137.089