Question

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

Today’s Dividend	$4.85
Discount Rate	6.00%
Growth rate in dividends 0 to 1	3.00%
Growth rate in dividends 1to 2	1.00%
Growth rate in dividends 2 to 3	3.00%
Growth rate in dividends 3 onward	7.00%

Answer 1

There seems to be some problem with growth rate from Year 3 onwards, It should be lower than discount rate.

Considering growth rate for Year 3 onwards is 1%.

D1 = 4.85*(1+0.03) = 4.9955

D2 = 4.85 *(1+0.03)*(1+0.01) = 5.045455

D3 = 4.86*(1+0.03)*(1+0.01)*(1+0.03) = 5.19681865

Terminal value for year 3 = D3 *(1+g)/(r-g) = 5.19681865 *(1+0.01)/(0.06-0.01) = 104.98

Share Price = Present value of future dividend and terminal value discounted at discount rate.

Share Price =  4.9955/(1+0.06)^1 + 5.045455/(1+0.06)^2 + 5.19681865/(1+0.06)^3 + 104.98/(1+0.06)^3

= 101.71 Answer