Question

(Non-constant growth)Pettyway Corp’s next annual dividend (D1) is expected to be $4. The growth rate in dividends over the next three years is forecasted at 15%. After that, Pettyway’s growth rate in dividend is expected to be 5%. The required return is 18%, what is the value of the stock.

Answer 1

a.	Present value of three years dividend
	Year	Dividend	Discount factor		Present Value
	1	$           4.00	0.847		$       3.39
	2	$           4.60	0.718		$       3.30
	3	$           5.29	0.609		$       3.22
		Total			$       9.91
b.	Present Value of after year 3's dividend
	Present Value		=	(D3*(1+g)/Ke-g))*DF3				Where,
			=	(5.29*(1+0.05)/(0.18-0.05))*0.609				D3	Year 3 dividend			$       5.29
			=	$    26.02				g	growth rate			5%
								Ke	Requirerd return			18%
								DF3	Discount factor for year 3			0.609
	Total present value of dividend			=	$       9.91	+	$    26.02
				=	$    35.93
	Thus, value of stock is		$    35.93