Question

The Newton Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15% a year for the next four years (Year 1, Year 2, Year 3, and Year 4) and then increase at the constant growth rate of 5% per year indefinitely. The company just paid its annual dividend in the amount of $1.50 per share. What is the current value of Newton Co.’s stock if the required rate of return is 8%?

Answer 1

Calculation of stock's current price:
Year	Particulars	Amount	PVF @8%	Present value
1	Dividend	1.725	0.926	1.60
2	Dividend	1.98	0.857	1.70
3	Dividend	2.28	0.794	1.81
4	Dividend	2.62	0.735	1.93
4	Terminal value	91.70	0.735	67.40
Total				74.43
So current price is $74.43
Working:
Calculation of dividend:
Year 1 Dividend=1.5(1+0.15)=$1.725
Year 2 Dividend=1.725(1+0.15)=$1.98
Year 3 Dividend=1.98(1+0.15)=$2.28
Year 4 Dividend=2.28(1+0.15)=$2.62
Terminal value= Dividend(1+growth)/(return-growth)
=2.62(1+0.05)/(0.08-0.05)=$91.7