Question

jay's outdoor wilderness outfitters currently (d0) pays $4.50 common stock. jennifer is considering an investment in jays outdoor wilderness outfitters and plans to hold the stock for four years at which time she expects to sell the stock for $70. She expects the dividend to increase to $5.00 one year from now and then grow at an 8% rate for the next five years. What is the current value of jays outdoor wilderness outfitters common stock to jennifer if she requires a 15% rate of return?

Answer 1

Div calculation:

Year	Cash flow	Formula	Calculation
1	$      5.00	Given	Given
2	$      5.40	D1 ( 1 +g )	5 * 1.08
3	$      5.83	D2(1 + g )	5.40 * 1.08
4	$      6.30	D3(1 + g )	5.83 * 1.08
5	$      6.80	D4(1 + g )	6.30 * 1.08
6	$      7.35	D5(1 + g )	6.80 * 1.08

Price of stock = PV of CFs from it.

Price Today:

Year	Particulars	Cash flow	PVF @15%	PV of CFs
1	D1	$      5.00	0.8696	$      4.35
2	D2	$      5.40	0.7561	$      4.08
3	D3	$      5.83	0.6575	$      3.83
4	D4	$      6.30	0.5718	$      3.60
4	P4	$   70.00	0.5718	$   40.02
Price Today				$   55.89