Question

Calculate the present value of a stock if this stock is expected to pay $2.5 annual dividend in the next 3 years, and it is expected to pay $3.5 annual dividend for year 4 to year 6. In year 7 and thereafter it pays $5 constant dividend forever. The interest rate is 8%. Please provide excel formula and explain your step-by-step calculation in your answer.

Answer 1

Annual Dividend in next 3 years = $2.5 per year

Annual Dividend for year 4 to 6 = $3.5 per year

Annual Dividend from year 7 and onwards = $5 constant per year

- Calculating the Horizon Value(HV) or Terminal value at Year 6 using Perpetuity(constant dividend) formula:-

Horizon value at year 6 = Annual Dividend from year 7/Interest rate

= $5/8%

Horizon Value at year 6 = $62.5

Calculating the Present Value of Stock;-

Year	Annual Dividend/Horizon Value ($)	PV Factor @8%	Present Value of Annual Dividend/Horizon Value ($)
1	2.50	0.92593	2.315
2	2.50	0.85734	2.143
3	2.50	0.79383	1.985
4	3.50	0.73503	2.573
5	3.50	0.68058	2.382
6	3.50	0.63017	2.206
6-HV	62.50	0.63017	39.386
			52.989

So, Present value of Stock is $52.99

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