Question

Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Please be extremely descriptive on how you got the answer to this or no rating.

Year 0 1 2 3 4 5 6 Growth Rate NA NA NA NA 85.00% 42.50% 8.00% Dividends $0.00 $0.00 $0.00 $0.250 $0.463 $0.660 $0.713

Answer 1

Discount rate	11.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
-	0	-	-
-	1	-	-
-	2	-	-
0.250	3	0.18	0.18
0.463	4	0.30	0.49
0.659	5	0.39	0.88
23.726	5	14.08	14.96

dividend in year four = 0.25*1.85

dividend in year 5 = 0.25*1.85*1.425

terminal value = 0.25*1.85*1.425*1.08/(0.11 - 0.08)

value of stock = 14.96