Question

Company is expected to have extraordinary growth of 20% for four years, after which it will face more competition and slip into a constant growth rate of 5%. Its required rate of return is 10%. Divieden is $5. What is the price of company's stocks?

 

 

Answer 1

Ke = 10%

Dividend = $ 5

 

The growth rate for 4 years = 20%

Growth rate after 4 years = 5% constant

 

Dividend for first 5 years

Year	Dividend
0	5
1	6
2	7.2
3	8.64
4	10.368
5	10.864

 

Total from 5 years as dividend growth is constant

so total dividend after 4 years = Dividend at 5 years/Ke - growth rate

                                                      = 10.864/10% - 5%

                                                      = $ 217.28

 

Particulars	Year	Amount($)	Present value factor @ 10%	Present value
Divident	1	6	0.909	5.454
Dividend	2	7.2	0.826	5.9472
Dividend	3	8.64	0.751	6.48864
Dividend	4	10.368	0.683	7.081344
Dividend	5	217.28	0.621	134.93088
Total				159.902064

 

So, Price of company stock = $ 159.9.

So, Price of company stock = $ 159.9.