Question

ABC common stock is expected to have have dividends in year 1 of $3/share,  year 2 of $3/share,year 3 of $3.2/share, year 4 of $3.4/share, and in year 5 of $3.6/share. Then dividends will grow at a constant rate of 6%.

If the discount rate is 15% , what should be the current share price? Hint: The growing perpetuity (Gordon growth model) should be put into year 5 along with the year 5 dividend before taking the present values.

		$31.16
		$31.80
		$37.42
		$47.77

Answer 1

D1: $ 3
D2: $ 3
D3 : $ 3.2
D4 : $ 3.4
D5 : $ 3.6 and growth rate after 5th year is 6%
Price of Share at the end of 5th Year (P5): Dividend 5th year ( 1 + Growth rate) / ( Discount rate - Growth rate)
Price of Share at the end of 5th Year (P5): $3.6 ( 1 + 0.06) / ( 0.15 - 0.06)
Price of Share at the end of 5th Year (P5): $3.816 / 0.09
Price of Share at the end of 5th Year (P5): $ 42.40
Calculation of price as on Today :
Year	Cashflow	PVF @ 15%		Present Value
1	$3.00	0.8696		$2.61
2	$3.00	0.7561		$2.27
3	$3.20	0.6575		$2.10
4	$3.40	0.5718		$1.94
5	$3.60	0.4972		$1.79
5	$42.40	0.4972		$21.08
			Expected current Value of share, today:	$31.80