Question

Thirsty Cactus Corp. just paid a dividend of $1.35 per share. The dividends are expected to grow at 40 percent for the next 10 years and then level off to a 7 percent growth rate indefinitely. Required : If the required return is 12 percent, what is the price of the stock today?

Answer 1

Price of stock today is $ 325.17.

As per dividend discount model, current share price is the present value of future dividends.
Step-1:Present Value of next 10 years
Year	Dividend	Discount factor	Present Value
a	b	c=1.12^-a	d=b*c
1	$       1.89	0.8929	$       1.69
2	$       2.65	0.7972	$       2.11
3	$       3.70	0.7118	$       2.64
4	$       5.19	0.6355	$       3.30
5	$       7.26	0.5674	$       4.12
6	$    10.16	0.5066	$       5.15
7	$    14.23	0.4523	$       6.44
8	$    19.92	0.4039	$       8.05
9	$    27.89	0.3606	$    10.06
10	$    39.05	0.3220	$    12.57
Total			$    56.11
Step-2:Present Value of dividend after year 10
Present Value	=	D10*(1+g)/(Ke-g)*DF10
	=	$ 269.06
Where,
D10	=	Year 10 dividend	=	$    39.05
g	=	Growth rate after year 4	=	7.00%
Ke	=	Required return	=	12.00%
DF10	=	Discount factor for year 10	=	0.3220
Step-3:Calculation of value of stock today
Value of stock today	=	$    56.11	+	$ 269.06
	=	$ 325.17