Question

Peagram Mine's 1st quarterly dividend is expected to be two years from today with an expected amount of $1.50 per share. Each subsequent quarterly dividend is expected to grow by 4 percent. Following the quarterly dividend eight years from now, the quarterly dividends are expected to grow by 2 percent each quarter. Given the risk associated with Peagram's stock, the required expected return is 18 percent per year (effective).   What is the price of one share of Peagram's stock?

Answer 1

				Required expected return	18%
				Effective quarter Required expected return	4.22%	((1.18)^(1/4))-1
Qtr			Dividend growth rate	Dividend	Present value of dividend
9	Year 3	Qtr 1	0%	$1.50	$1.03	1.5/((1+4.22%)^9)
10		Qtr 2	4%	$1.56	$1.03	1.56/((1+4.22%)^10)
11		Qtr 3	4%	$1.62	$1.03
12		Qtr 4	4%	$1.69	$1.03
13	Year 4	Qtr 1	4%	$1.75	$1.02
14		Qtr 2	4%	$1.82	$1.02
15		Qtr 3	4%	$1.90	$1.02
16		Qtr 4	4%	$1.97	$1.02
17	Year 5	Qtr 1	4%	$2.05	$1.02
18		Qtr 2	4%	$2.13	$1.01
19		Qtr 3	4%	$2.22	$1.01
20		Qtr 4	4%	$2.31	$1.01
21	Year 6	Qtr 1	4%	$2.40	$1.01
22		Qtr 2	4%	$2.50	$1.01
23		Qtr 3	4%	$2.60	$1.00
24		Qtr 4	4%	$2.70	$1.00
25	Year 7	Qtr 1	4%	$2.81	$1.00
26		Qtr 2	4%	$2.92	$1.00
27		Qtr 3	4%	$3.04	$0.99
28		Qtr 4	4%	$3.16	$0.99
29	Year 8	Qtr 1	4%	$3.29	$0.99
30		Qtr 2	4%	$3.42	$0.99
31		Qtr 3	4%	$3.55	$0.99
32		Qtr 4	4%	$3.70	$0.98
33	Year 9	Qtr 1 to Perpetuity	2%	$3.77
		Dividend till perpetuity		$169.51	$43.27	3.77/(4.22%-2%)
					$67.47