Question

A stock is expected to pay a dividend of $1.3 one year from now, $1.7 two years from now, and $2.3 three years from now. The growth rate in dividends after that point is expected to be 8% annually. The required return on the stock is 12%. The estimated price per share of the stock six years from now should be $_________.

Answer 1

As per dividend discount model, price of stock is the present value of future dividends.
Step-1:Calculation of dividend in year 6
	Dividend in year 6		=	Dividend in year 3*(1+Growth rate)^Years
			=	2.3*(1+0.08)^3
			=	$       2.90
Step-2:Calculation of stock price in year 6
	Stock Price in year 6		=	D6*(1+g)/(Ke-g)			Where,
			=	2.90*(1+0.08)/(0.12-0.08)			D6	Dividend of year 6		$       2.90
			=	$    78.30			g	Growth in dividend		8%
							Ke	Required return		12%
So,
	Stock price 6 years from now should be				$    78.30