Question

(Non-constant growth)Pettyway Corp's next annual dividend (D1) is expected to be $4. After that, the growth rate in dividends over the next three years is forecasted at 18%. And after that, Pettyway's growth rate in dividends is expected to be 2.8%. The required return is 10%. Then the value of the stock is $______.

 

Answer 1

Calculation of value of stock

Value of stock = D1/(1+r)1+D2/(1+r)2+D3/(1+r)3+D4/(1+r)4+terminal value/(1+r)4

here,

required return = 10%

 

D1 = 4

D2 = 4*(1+18%) = 4.72

D3 = 4.72*(1+18%) = 5.5696

D4 = 5.5696*(1+18%) = 6.5721

D5 = 6.572128*(1+2.8%) = 6.7561

 

Terminal value = D5/(r-g)

                           = 6.7561/(10%-2.8%)

                           = 93.8347

 

Value of the stock = 4/(1+10%)1+4.72/(1+10%)2+5.5696/(1+10%)3+6.5721/(1+10%)4+93.8347/(1+10%)4

                                 = 3.636364+3.90082645+4.18452292+4.48883273+64.0903627

                                 = 80.30

 

Value of the stock = $80.30.

Value of the stock = $80.30.