A stock just paid a dividend of $1.69. The dividend is expected to grow at 27.92%...

A stock just paid a dividend of $1.69. The dividend is expected to grow at 27.92% for three years and then grow at 3.03% thereafter. The required return on the stock is 10.55%. What is the value of the stock?

Expert Solution

Value of stock today is $ 42.71

As per dividend discount model, current share price is the present value of future dividends.

Step-1:Present Value of next 3 years

Year	Last dividend	Current Dividend	Discount factor	Present Value
a	b	c=b*1.2792	d=1.1055^-a	e=c*d
1	$ 1.69	$ 2.16	0.904568	$ 1.96
2	$ 2.16	$ 2.77	0.818243	$ 2.26
3	$ 2.77	$ 3.54	0.740157	$ 2.62

Total				$ 6.84

Step-2:Present Value of dividend after year 3

Present Value	=	D3(1+g)/(Ke-g)DF3
	=	$ 35.87

Where,
D3	=	Year 3 dividend	=	$ 3.54
g	=	Growth rate after year 3	=	3.03%
Ke	=	Required return	=	10.55%
DF3	=	Discount factor for year 3	=	0.740157

Step-3:Calculation of value of stock today

Value of stock today	=	$ 6.84	+	$ 35.87
	=	$ 42.71

jeff jeffy answered 2 years ago

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