Question

Darla Davidovics would like to purchase the stock of Dalmation Dolls Inc. The company plans to pay a dividend of $4.18 next year which will grow by 5.2% in the second year of the holding period. The dividend is expected to grow by 7.5% in the third year of the holding period and Darla expects to sell the stock at the end of that year for $85. If Darla’s expected rate of return on this stock is 21%, what is the maximum she would pay if she purchases the stock today ?

Answer 1

Price today is the present value of future cash flow
i	ii	iii=i+ii	iv	v	vi=iv*v
year	Dividend	Terminal value	total cash flow	PVIF @ 21%	present value
1	4.1800		4.18	0.8264	3.45
2	4.3940		4.39	0.6830	3.00
3	4.7236	85.00	89.72	0.5645	50.65
Price =					57.10