Question

Company XYZ does not currently pay a dividend. However, their earnings have been growing at a very high rate. Thus, they are expected to begin paying a dividend, starting 7 years from today. Expectations are that the first dividend will be $ 2.0 per share. The dividend is then expected to grow at 20 % per year for 6 years, and at the end of that super-normal growth period, the stock will enter a slower growth perpetuity phase of 8 % per year. The required return on Agilent stock is 16 %. What should be their current stock price? (Please make sure to not do any intermediate rounding and keep at least 6 decimal points throughout solving this problem.

Answer 1

Dividend for year 7 =2
D8 =2*(1+20%)
D9 =2*(1+20%)^2
D10 =2*(1+20%)^3
D11 =2*(1+20%)^4
D12 =2*(1+20%)^5
D13 =2*(1+20%)^6
Terminal Value =D13*(1+g)/(Required Rate-growth) =2*1.20^6*(1+8%)/(16%-8%) =80.6216

Current Stock Price =D7/(1+r)^7+D8/(1+r)^8+D9/(1+r)^9+D10/(1+r)^10+D11/(1+r)^11+D12/(1+r)^12+D13/(1+r)^13+terminal Value/(1+r)^13 =2/1.16^7+2*1.20/1.16^8+2*1.20^2/1.16^9+2*1.20^3/1.16^10+2*1.20^4/1.16^11+2*1.20^5/1.16^12+2*1.20^6/1.16^13
+80.6216/1.16^13 =17.20