Question

Greshak Corp. forecasts its dividends to be $4.00 per share next year, $4.50 per share in two years, and $5.00 per share in three years. After the third year, dividends are anticipated to grow at a constant sustainable rate of 4.0% per year. If Greshak’s cost of capital is 12.0% and its applicable tax rate is 30.0%, what is the estimated share price for the company's common equity?  YOU MUST USE AT LEAST 4 DECIMAL PLACES IN ALL CALCULATIONS AND SHOW ALL WORK TO RECEIVE CREDIT.

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 @ 12%	present value
1	4.00			4.00	0.892857143	3.57
2	4.50			4.50	0.797193878	3.59
3	5.00		$             65.00	70.00	0.711780248	49.82
						56.98
Terminal value = Divided in year 7/(required rate - growth rate)
		5*104%/(12%-4%)
		$        65.00
Price today =					$        56.98
Ans =						$        56.98