Question

Given the information in the table, what is TODAY’s price of the stock?

Today’s Dividend	$3.79
Discount Rate	3%
Growth rate in dividends 0 to 1	3%
Growth rate in dividends 1 to 2	5%
Growth rate in dividends 2 to 3	5%
Growth rate in dividends 3 onward	1%

Answer 1

D1=(3.79*1.03)=3.9037

D2=(3.9037*1.05)=4.098885

D3=(4.098885*1.05)=4.30382925

Value after year 3=(D3*Growth rate)/(Discount rate-Growth rate)

=(4.30382925*1.01)/(0.03-0.01)

=217.343377

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=3.9037/1.03+4.098885/1.03^2+4.30382925/1.03^3+217.343377/1.03^3

=$210.49(Approx)