Question

Given the information in the table, what is TODAY’s price of the stock?

Today’s Dividend	$2.73
Discount Rate	3.00%
Growth rate in dividends 0 to 1	7.00%
Growth rate in dividends 1to 2	8.00%
Growth rate in dividends 2 to 3	2.00%
Growth rate in dividends 3 onward	1.00%

Answer 1

Present value of stock = $157.47

Explanation;

Present Value of stock = Present value of all future cash Flows i.e. Future Dividends

Present Value of Stock = D1/(1+Ke) + D2/(1+Ke)^2 + D3/(1+Ke)^3 + [D4/(Ke-G4)]/(1+Ke)^3

D1 = Dividend year 1 + Growth Year 1 i.e. $2.73 + 7% = $2.92

D2 = D1 + G2 = $2.9211 + 8% = $3.15

D3 = D2 + G3 = $3.154788 + 2% = $3.22

D4 = D3 + G4 =$3.2178838 + 1% =$3.25

Ke = 3%

So,

Present value of stock = $2.92/(1.03) + $3.15/(1.03)^2 + $3.22/(1.03)^3 + [ $3.25/(3$ - 1%)]/(1.03)^3

= $2.84 + $2.97 + $2.95 + $162.5/(1.03)^3

= $8.76 + $148.71

= $157.47

Cross check;