Question

Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1.50 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by 50 percent a year for 3 years. Dividends are expected to grow at a rate of 20 percent for another 2 years. After the sixth year, dividend growth is expected to settle down to a more moderate long-term growth rate of 8 percent. If the firm’s investors expect to earn a return of 20 percent on this stock, what must be its price?

Answer 1

we have to use dividend discount model to compute the terminal value
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 @ 20%	present value
1	1.5000		1.50	0.8333	1.25
2	2.2500		2.25	0.6944	1.56
3	3.3750		3.38	0.5787	1.95
4	5.0625		5.06	0.4823	2.44
5	6.0750		6.08	0.4019	2.44
6	7.2900	65.61	72.90	0.3349	24.41
Price =					34.06
Terminal value = Divided in year 7/(required rate - growth rate)
		7.290*108%/(20%-8%)
		65.61
Price today =				$        34.06