Question

What is the current stock price of Slack Inc. that will pay its first yearly dividend of $3.00 in year 5, which will then grow for another 30 years at 8% per year, after which it will grow at 4% forever? The required rate of return on this stock is 13%.

Answer 1

Step 1: Computation of market price at the end of year 35 using Gordon Growth Model

P35 = D36 / (Ke – g)

Where,

P35 - Market price at the end of year 35 = ?

D36 - Expected dividend in year 36 = 3*1.08^30*1.04 = 31.3954894939

Ke – Cost of equity = 13%

G – Growth rate in dividend = 4%

P35 = 31.3954894939/(.13-.04)

= 31.3954894939/.09

= 348.84

Step 2: Computing current share price by discounting the cashflow at required return

Year	Dividend	PVF@13%	Present Value (Cashflow*PVF)
5	3.00	0.543	1.63
6	3.24	0.480	1.56
7	3.50	0.425	1.49
8	3.78	0.376	1.42
9	4.08	0.333	1.36
10	4.41	0.295	1.30
11	4.76	0.261	1.24
12	5.14	0.231	1.19
13	5.55	0.204	1.13
14	6.00	0.181	1.08
15	6.48	0.160	1.04
16	6.99	0.141	0.99
17	7.55	0.125	0.95
18	8.16	0.111	0.90
19	8.81	0.098	0.86
20	9.52	0.087	0.83
21	10.28	0.077	0.79
22	11.10	0.068	0.75
23	11.99	0.060	0.72
24	12.95	0.053	0.69
25	13.98	0.047	0.66
26	15.10	0.042	0.63
27	16.31	0.037	0.60
28	17.61	0.033	0.58
29	19.02	0.029	0.55
30	20.55	0.026	0.53
31	22.19	0.023	0.50
32	23.96	0.020	0.48
33	25.88	0.018	0.46
34	27.95	0.016	0.44
35	379.03	0.014	5.26

current share price = Cashflow*PVF

= $32.59

You can use the equation 1/(1+i)^n to find PVF using calculator

Formula to calculate PV in excel is as follows "=PV(interest rate,Year,0,cashflow)"