Question

Consider a stock with current year dividend equal to $2.00 per share. You believe the dividend will grow 15% per year for 10 years and 4% per year thereafter.The required equity rate of return (and your hurdle rate) is 10%.

What is the fair price of the stock?

Assuming the market price of the stock is $70, what is the expected return?

Answer 1

Year	Particulars	Cash flow	× discount rate	Present value
1	Dividend	$      2.3000	0.90909	$      2.09
2	Dividend	$      2.6450	0.82645	$      2.19
3	Dividend	$      3.0418	0.75131	$      2.29
4	Dividend	$      3.4980	0.68301	$      2.39
5	Dividend	$      4.0227	0.62092	$      2.50
6	Dividend	$      4.6261	0.56447	$      2.61
7	Dividend	$      5.3200	0.51316	$      2.73
8	Dividend	$      6.1180	0.46651	$      2.85
9	Dividend	$      7.0358	0.42410	$      2.98
10	Dividend	$      8.0911	0.38554	$      3.12
10	Share price	$ 140.2460	0.38554	$   54.07
Stock price today			$   79.82

Fair price of stock is $79.82

Stock price is 70 at 10.72% expected return:

Year	Particulars	Cash flow	× discount rate	Present value
1	Dividend	$      2.3000	0.90318	$      2.08
2	Dividend	$      2.6450	0.81573	$      2.16
3	Dividend	$      3.0418	0.73675	$      2.24
4	Dividend	$      3.4980	0.66542	$      2.33
5	Dividend	$      4.0227	0.60099	$      2.42
6	Dividend	$      4.6261	0.54280	$      2.51
7	Dividend	$      5.3200	0.49025	$      2.61
8	Dividend	$      6.1180	0.44278	$      2.71
9	Dividend	$      7.0358	0.39991	$      2.81
10	Dividend	$      8.0911	0.36119	$      2.92
10	Share price	$ 125.2196	0.36119	$   45.23
Stock price today			$   70.01

Expected return is 10.72%

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