Question

Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $1.30 per share. What is the current value of one share of this stock if the required rate of return is 9.00 percent?

Answer 1

	Required rate=	9.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.3	23.00%	1.599		1.599	1.09	1.467
2	1.599	23.00%	1.96677		1.96677	1.1881	1.65539
3	1.96677	23.00%	2.4191271		2.4191271	1.295029	1.86801
4	2.4191271	23.00%	2.975526333	78.108	81.08352633	1.41158161	57.44161
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	62.43

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor