Question

Ivanhoe, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.63 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 17 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Please explain calculations for excel, I cannot figure this one out. TIA.

Answer 1

Data given can be summarized as below

	Year 1	Year 2	Year 3	Year 4	Year 5
Growth rate	30%	30%	17%	17%	8%
Dividend	$2.63	$3.42	$4.00	$4.68	$5.05
PV of dividend	$2.25	$2.50	$2.50	$2.50
Terminal value				$56.16
PV of terminal value				$29.97
Intrinsic value				$39.71

Dividend in year 2 = dividend in year 1 * (1 + growth rate in year 2) = 2.63 * (1 + 30%) = 3.42

Dividend in year 3 = dividend in year 2 * (1 + growth rate in year 3) = 3.42 * (1 + 17%) = 4.00

Dividend in year 4 = dividend in year 3 * (1 + growth rate in year 4) = 4.00 * (1 + 17%) = 4.68

Dividend in year 5 = dividend in year 4 * (1 + growth rate in year 5) = 4.68 * (1 + 8%) = 5.05

PV of year 1 dividend = year 1 dividend / ((1+discount rate) ^ year) = 2.63 / ((1+17%)^1) = 2.25

PV of year 2 dividend = year 2 dividend / ((1+discount rate) ^ year) = 3.42 / ((1+17%)^2) = 2.50

PV of year 3 dividend = year 3 dividend / ((1+discount rate) ^ year) = 4.00 / ((1+17%)^3) = 2.50

PV of year 4 dividend = year 4 dividend / ((1+discount rate) ^ year) = 4.68 / ((1+17%)^4) = 2.50

Terminal value using dividend discount model = next year's dividend (discount rate - dividend growth rate)

= 4.68 * (1 + 8%) / (17% - 8%) = 56.16

PV of terminal value = 56.16 / (1 + 17%)^4 = 29.97

Intrinsic value = PV of dividends + PV of terminal value = 2.25 + 2.50 + 2.50 + 2.50 + 29.97 = 39.71