Question

Hank’s Barbecue just paid a dividend of $1.90 per share. The dividends are expected to grow at a 13.0 percent rate for the next five years and then level off to a 8.0 percent growth rate indefinitely. If the required return is 11.0 percent, what is the value of the stock today? What if the required return is 16.0 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

The value of stock today is $84.81, if the required rate of return is 11%

The value of stock today is $31.29, if the required rate of return is 16%

Year	Cashflow		Growth Rate	Present Value
1	$      2.1470	<D1=D0*(1+g)	13%	$            1.9342	<=Cashflow/(1+Ke)^1
2	$      2.4261	<D2=D1*(1+g)	13%	$            1.9691	<=Cashflow/(1+Ke)^2
3	$      2.7415	<D3=D2*(1+g)	13%	$            2.0046	<=Cashflow/(1+Ke)^3
4	$      3.0979	<D4=D3*(1+g)	13%	$            2.0407	<=Cashflow/(1+Ke)^4
5	$      3.5006	<D5=D4*(1+g)	13%	$            2.0775	<=Cashflow/(1+Ke)^5
5	$ 126.0226	<P5=D5*(1+g)/(Ke-g)	8%	$          74.7883	<=Cashflow/(1+Ke)^5
				$          84.8143

b)  If required return is 16%

Year	Cashflow		Growth Rate	Present Value
1	$   2.1470	<D1=D0*(1+g)	13%	$            1.8509	<=Cashflow/(1+Ke)^1
2	$   2.4261	<D2=D1*(1+g)	13%	$            1.8030	<=Cashflow/(1+Ke)^2
3	$   2.7415	<D3=D2*(1+g)	13%	$            1.7564	<=Cashflow/(1+Ke)^3
4	$   3.0979	<D4=D3*(1+g)	13%	$            1.7109	<=Cashflow/(1+Ke)^4
5	$   3.5006	<D5=D4*(1+g)	13%	$            1.6667	<=Cashflow/(1+Ke)^5
5	$ 47.2585	<P5=D5*(1+g)/(Ke-g)	8%	$          22.5004	<=Cashflow/(1+Ke)^5
				$          31.2882