Question

Given the information in the table, what is the price of the stock in YEAR 1? Today’s Dividend $3.78 Discount Rate 7.94% Growth rate in dividends 0 to 1 7.52% Growth rate in dividends 1 to 2 8.95% Growth rate in dividends 2 to 3 6.38% Growth rate in dividends 3 onward 3.08%

Answer 1

The value of the stock is computed as shown below:

= Dividend in year 2 / (1 + required rate of return)¹ + Dividend in year 3 / (1 + required rate of return)² + 1 / (1 + required rate of return)² [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 3.78 x 1.0752 x 1.0895 ) / 1.0794 + ($ 3.78 x 1.0752 x 1.0895 x 1.0638) / 1.0794² + 1 / 1.0794² x [ (($ 3.78 x 1.0752 x 1.0895 x 1.0638 x 1.0308) / (0.0794 - 0.0308) ]

= $ 4.428006912 / 1.0794 + $ 4.710513753 / 1.0794² + $ 99.90941516 / 1.0794²

= $ 4.428006912 / 1.0794 + $ 104.6199289 / 1.0794²

= $ 93.90